UBS analysts this week said that the US has a 31% chance of having a recession next year. Does this mean the world is heading toward another crisis?
Weak US jobs data
While unemployment rates in the US are hanging around the 4.9% mark it’s the non-farm payroll data that’s receiving most of the attention. The Federal Reserve was poised to raise rates but sluggish non-farm payroll data has quashed an interest rate rise this summer. In August the US created 151,000 jobs, which was under the 180,000 forecast and put a damper on the two previous months of good growth. US manufacturing also shrank in December, which added weight to the argument that the US economy is slowing. If the US slips into recession next year then it’s likely that the world economy will be dragged lower too.
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Although China has fallen out of the news since February it’s still a worrying situation. GDP data does look promising but analysts pointed out that this growth was driven by government stimulus rather than expansion in the private sector. Private sector investment was actually down 3.8% in the half of 2016. China remains a key part of the complex global economic landscape and any further slowdown in China would have serious knock-on effects in the US and the rest of the world. I think all investors should have one eye on China at all times.
I think it’s fair to say that in the last few decades the world has gone debt mad. Developing country debt rose by a whopping $31trn between 2000 and 2014 and emerging economies also took on vast amounts of debt. However, corporate debt is the main issue and that figure currently stands at $51trn. Faced with poor organic growth alongside rock bottom borrowing rates, businesses have leveraged balance sheets and used debt to buy back shares, acquire businesses and pay dividends. This has led to a lack of organic growth across the world and if the ‘debt binge’ ends, then we could see lots of companies in deep trouble.
Europe’s banks look weak
The banks of Europe have been struggling for years and it looks like the first big victim may be on its way. After worrying over French, Italian and Greek banks for years the focus has switched to Germany. The German banks and in particular Deutsche Bank don’t look solid. It has over $70trn of derivative exposure, billions of dollars worth of fines and lawsuits to pay and deep connections to most of the world’s banks. This makes the company key to the health of the global banking system and in particular Europe’s banks.
However, if you think we’re slipping into recession, there’s still value and upside to be found in equity markets with a number of solid, defensive shares. Defensives like British American Tobacco and Centrica could provide a great safe haven for cash and pay you a nice dividend. AstraZeneca for example returned over 29% in crisis year 2008 while the FTSE 100 fell a whopping 31%. That’s an impressive outperformance of 60% in just 12 months.