Strong US performance

It is highly unusual for US GEAR levels to outperform aggregate emerging markets (EM) so strongly. US GDP print for the second quarter finally hit 4.1 per cent, the strongest since 2014, and our GEAR had been promising for a few months. Indeed, the GEAR continues to do so, suggesting the outsized US economic strength could continue into the second half. Most of the underlying components in the US remain broadly unchanged, although the fall in housing-related indicators bears monitoring.

On the EM front, Brazil (-1.1 per cent) is negative; South Africa (1 per cent) hovers near post-crisis lows; Mexico (1.6 per cent) entered its election season on a subdued note and Turkey (2.2 per cent) has fallen seven percentage points since the turn of the year.

Source: Fidelity International, July 2018

Meanwhile, China’s GEAR at 8.2 per cent remains incongruously strong, but underlying components show plenty of reason for concern - industrial revenue, investment, real estate are all weakening. India’s GEAR at 8.5 per cent has been recovering strongly after a very soft patch, but it is too early to say that growth is breaking out of its range over the last few years.

The Eurozone and Japan are in a bit of a holding pattern. At 2.6 per cent and 1.9 per cent respectively, they are down meaningfully from their highs, but look resilient enough and are broadly unconcerning. However, if our Fidelity Leading Indicator is correct, the path should still be downwards from here for these globally-sensitive economies.

UK GEAR at 2 per cent has edged up in the past two months, but not significantly so, and certainly not to the extent that it should excite the Bank of England. While first quarter GDP was indeed hurt by a one-off weather impact, there is absolutely no indication that UK growth will accelerate from the sluggish pace it has displayed every single quarter since the Brexit vote.

Ian Samson

Ian Samson

Portfolio Manager