Gross-domestic-product data from Europe this morning paints a grim picture. Total growth for the 19-nation region expanded by only 0.3 percent during the last quarter, according to data released by Eurostat, below the prior three-month period and weaker than consensus economist forecasts. The two largest economies in the common currency bloc, Germany and France, were in line with the aggregate while Italy’s pace of growth was 0.2 percent. This confirmation of slowing growth adds pressure to both European Central Bank President Mario Draghi and his counterpart at the Bank of England across the English Channel. For Draghi, calls for expanded quantitative easing are growing louder among regional elected officials as the December ECB meeting approaches. Meanwhile, BofE Governor Mark Carney has identified a strong pound sterling as a challenge to his bank’s attempts to spark inflation, a trend that could be exacerbated by a euro weakened by the now-busy printing presses in Frankfurt.
Syngenta back in play. On Friday, the China National Chemical Corp. announced that it had begun discussions with Swiss agrichemical giant Syngenta about a potential merger valued at $42 billion. Syngenta’s board of directors rejected a $46 billion bid by St. Louis-based Monsanto earlier this year.
Chinese exchanges tighten margin-loan rules. On Friday, both the Shanghai and Shenzhen stock exchanges announced increases in margin requirements that will limit investors to two-to-one leverage. Previously brokers were allowed to offer traders three-to-one leverage for share purchases. Total margin debt on the Shanghai Stock Exchange declined by half between the peak and trough of benchmark indices this year before expanding once again in recent weeks as stocks recovered.
BOJ seeks to strengthen reserves. Japan’s Nikkei newspaper today reported that the Bank of Japan sent a memorandum to the Ministry of Finance earlier this week requesting that the central bank retain a larger portion of profits than it has in the past. Bank policymakers are seeking to boost reserves rather than distribute returns into government coffers as a precaution against declines in the ever-increasing quantity of assets acquired through its massive quantitative-easing program.
Mylan’s bid for Perrigo may fail. Reports in multiple media outlets citing unidentified sources suggest that Canonsburg, Pennsylvania-based generic and specialty drug maker Mylan’s tender offer for Perrigo has been unsuccessful, with too few shareholders accepting the offer by this morning’s deadline to secure a majority. The rejection of the $26 billion cash and stock offer for the Irish pharmaceutical manufacturer comes after months of bitter public back and forth by the two managements.
Retail sales fall short of expectations. October retail sales excluding automotive released today by the US Census Bureau registered an expansion of 0.4 percent versus September, significantly lower than consensus forecasts while improving over the prior reading. Sales including cars and trucks also failed to meet economists’ projections. Some industry analysts have noted that the low cost of fuel has not yet had the impact on household consumption that retailers had hoped for as the critical holiday shopping season gears up.
Portfolio Perspective: Investors Too Bearish on China
We think that investors have become too bearish in regards to the outlook for the Chinese economy. There are many high-quality companies, with solid growth, strong balance sheets, and good free cash flow that are trading at a discount to global peers and their own history. There is no question that the Chinese economy faces challenges as it shifts from an investment-led economy to one driven by consumption. However, the Chinese have many tools at their disposal to smooth the transition, such as additional fiscal stimulus and easing of financial conditions through lower interest rates and bank-reserve requirement ratios. Recently, we observe a greater sense of urgency from the Chinese government as it seeks to cushion the slowdown. This could lead to an uptick in growth measures during the first half of next year. In keeping with our comprehensive approach to value at Thornburg, we have used a barbell approach in our investment strategy by investing in “old China” companies that will benefit from renewed stimulus efforts in addition to “new China” companies that will capture the growth opportunity around the economic transition.
Charlie Wilson, portfolio manager and managing director, Thornburg Investment Management in Santa Fe, New Mexico.
