There is a purging in Turkey, turmoil in Europe, and a heated election in the U.S., yet the market has had its best month all year. With so much political uncertainty it's hard to see through the noise to find out which stories will be most important to the global economy in the coming months. Often, it's hard to see the forest for the trees, and what makes the headlines isn't necessarily what will drive the global economy.
In this update, we'll tell you about two disparate economies that aren't making headlines, but which are examples of underlying trends that we think will have a significant impact. The first, Italy, is a country looking for ways to relieve its financial issues by pushing them out to the future. It's a mature economy, and is a good example of one that's adding to global volatility. The second, India, is trying to invest in its future and this model for growth is one we think more and more countries will start to follow.
Italy, a member of the affably named PIIGS, has the potential to become a bigger threat to the Eurozone than this summer's Brexit. Why does this matter more than a Grexit or a Brexit? Italy is Europe's 4th largest economy and that economy has shrunk by 9% since 2008 on the back of weak demand and high debt. The country's banks are facing insolvency with about €360 billion of bad loans on their books, which is about a 5th of GDP. The market is already pricing that in (see chart below) but the bigger issue is that much of this debt is held by private investors. Should the European Central Bank step in to bail out the banks, current rules stipulate that bondholders face losses first. All eyes will be on European policy makers as they decide whether or not to add a clause to the rules and set a new precedent, protecting debt holders of "too big to fail" companies; in the long run, this will not encourage the right kind of austerity among corporations and instead kicks the can down the road.
There are many political issues going on in Europe at the moment that require attention, but we'll be keeping a close eye on the situation in Italy as it unfolds.
Italy Stock Index
India, once the laggard of the BRIC nations, is now an example of political and economic reform. The country is shaking the image of the underwhelming economy and is starting to gain momentum. Low energy prices have helped, but India's success can be attributed to the reduction of red tape and the investment in infrastructure, a planned $40 billion over the next year. Rating agencies have improved their rating, corporate earnings are up, and the current account balance has improved. Changes like this will be positive for a massive country that has a growing middle class, and thus, a consumer market which will demand more from the rest of the globe. Countries like Canada and, most recently, Japan are also adopting this form of fiscal stimulus to invest in the country, and creating a future much more favourable to do business.
India Stock Index
The message here is that there is a lot more to consider when it comes to the growth of your investments than today's headlines. The fact that the stock market is at an all-time high after several months of stagnation, we believe, is not an overreaction, but more a consequence of a global market with upside potential. The global economy continues to grow (albeit slowly), corporate earnings have not disappointed, and emerging economies are creating massive consumer markets that will have an appetite for further progress. Countries that don't kick the can down the road but invest in the future instead will be the best suited to capitalize on the opportunity.
As always, for long-term investors, your sights are on the horizon. We expect headlines to continue to drive volatility, but see several reasons for positive growth in the long term.