Daily Agenda: IMF Downbeat on Global Growth Prospects
IEA says oil supplies will continue to dampen prices; Beijing cuts oil production; Puerto Rico’s legislature faces deadline on debt deal.
China National Bureau of Statistics GDP data issued today held few surprises: the official growth rate in the final quarter of 2015 registered at an annualized 6.8 percent in line with consensus forecasts, bringing the full-year pace to 6.9 percent and barely missing the official 7 percent target. There were some positive data points, however, with service sector activity and household consumption continuing to rise. While global equity markets reacted positively to the news, growth prospects for the developing world in 2016 continues to cast a shadow over investor sentiment. The International Monetary Fund today issued its quarterly update World Economic Outlook report, which included a reduction in global growth projections from a pace of 3.6 percent to 3.4 for the year. According to the organization’s analysis, in addition to sluggish demand from China, Brazil is likely to sink deeper into recession while a rising dollar will weigh on segments of the U.S. economy.
IEA: oil prices may drop even more. In a report issued today, the International Energy Agency (IEA) forecast that increasing supply in non-OPEC nations, combined with as much as 600,000 additional barrels a day coming to market as sanctions against Iran are lifted, will offset any Saudi Arabia-led move to support prices by trimming production. IEA analysts also revised 2016 global demand projections downward. Separately, the International Monetary Fund today lowered growth forecasts for Saudi Arabia. Expectations are for the Gulf kingdom’s full-year 2016 GDP to slow to an annualized 1.2 percent and 1.9 percent for 2017 on the back of collapsing oil prices.
U.K. consumer prices edge up slightly. Data released today by the U.K. Office for National Statistics indicated a modest increase in consumer prices for December with the headline index gaining 0.1 percent versus November. The retail price index grew significantly higher than forecast, at 0.3 percent for the month. The marginal price hike was attributed largely to stabilizing retail gasoline costs and a rise in service sector charges. Separately, Eurostat CPI data for the euro zone indicated little price pressure, with headline CPI registering flat for December on a month-over-month basis.
Deadline looms in Puerto Rico. Lawmakers in Puerto Rico have until Friday to approve a restructuring proposal for $9 billion in debt issued by the Puerto Rico Electric Power Authority. Political pushback among elected officials on the island centers on the ability for the utility to hike power costs significantly in order to meet obligations to creditors. Puerto Rico, which as a U.S. territory rather than a state, does not have access to Chapter 9 bankruptcy protection, faces nearly $70 billion in debt in total. The island’s economy remains mired in a recession that Governor Alejandro García Padilla says will make it impossible to pay bondholders.
Beijing cuts oil production. CNOOC, China’s largest state-owned oil producer, today announced that it will scale back extraction by roughly 5 percent in 2016, as cost-cutting measures are implemented in the face of low oil prices. This will be the first time in more than a decade that the firm has reduced production on an annualized basis. According to statements issued by company management, CNOOC may not reach 2015 production levels again until 2018.
Portfolio Perspective: It’s DPS, not EPS, that Matters in 2016 — Sean Darby, Jefferies
Although 2016 ought to mean a better bottom-line U.S. earnings story, global equity markets are still being driven by the “reach for yield.” The U.S. equity market will remain challenged since dividend growth will come under pressure — ironically just as earnings are apparently turning around. The perplexing environment for equities is being led by higher real bond yields and weaker dividend payout ratios.
Last year, U.S. earnings experienced a so-called growth recession, while dividend-per-share (DPS) growth was roughly in the double digits. However, the slew of dividend cuts from last year stemming from declining energy prices and weaker operating cash flow is going to mean that the rate of growth of DPS will decelerate to about 5 percent. While investors have historically tried to navigate an earnings cycle, they may need to maneuver around companies that will slow or cut their dividends in 2016.
With still more central banks easing rather than raising rates alongside tame inflation measures, the macro backdrop will still encourage investors to search for yield. Interestingly, the performance of baskets that grew their dividend payout ratios flatlined last year after a period of strong outperformance. Furthermore, U.S. companies have already borrowed extensively to undertake share buybacks and there is less room for shareholder friendly programs in 2016. Hence the overall running yield — buyback plus dividend yield — will likely slow over the next 12 months.
Sean Darby is chief global equity strategist at Jefferies in Hong Kong.