Economic activity in the US is still robust, and there is no recession in sight. The length of the present business cycle is longer than average. There are several reasons for this: a) supportive monetary policies, b) a business cycle that is in sync with the rest of the world, and c) a tax deal that is supportive of ongoing spending and capex. The prospect of rising interest rates is generating an increasingly negative sentiment toward the consumer staples and discretionary sectors, as well as utilities and ultimately, REITs (as a sub-sector).
Quantity is no longer the most important norm in Asia; rather, the new norm is quality. On the back of this shift, growth figures are now reflecting more and more local consumption. The Asian near-term outlook can be considered as resilient, with reforms taking shape, financial markets de-leveraging, and somewhat slower growth for the years ahead.
Industrial production growth strengthened during the entirety of 2017. Still, a weaker consumer sentiment and a stronger Euro prevented the markets from taking advantage of the solid foundations. At present, consumer sentiment is once again decreasing, which will ultimately impact consumption growth.
In the past years, lowflation was highly supportive for markets. That occurred on the back of accommodative central bank policies. Unemployment levels and consumptions have now reached levels that have not been seen for years in many countries. With the overall growth outlook firming, consumer and business sentiments peaking, and corporate profits holding steady, we expect that capex will become a key driver for future profits.
Economic reforms, improved corporate fundamentals and reasonable valuations all support Latam stocks. Above-trend expansion in the developed world is highly positive for a continent that is emerging from multiple setbacks. Risks such as a rising US dollar, trade tensions and elections provide an argument for selectivity.