AMP Capital's Investment Brief for July 2009

Global

Review

July was another month of economic data showing that the global economic recession was drawing to a close, with a number of indicators reaching multi-month highs after bouncing from deeply depressed levels. Consensus forecasts of global growth continued to nudge up following the overshoot to the downside earlier in the year.

In the US, GDP data showed that the economy contracted by an annualised 1% in the June quarter, much less than the circa 6% contraction seen over the December and March quarters. Timelier indicators suggested further improvement in economic momentum. The Conference Board's leading indicators series lodged its third consecutive monthly increase in July, while the closely watched ISM manufacturing index rose to 44.8, its highest level since August 2008. Housing market data suggested that the worst was over, with housing starts, permits, existing and new sales all showing some improvement, while the Case-Shiller house price index showed its first monthly increase in almost three years in May. Balancing out these positive indicators, non-farm payrolls disappointed in June, consumer confidence weakened a little and retail sales were weaker than expected despite showing signs of stabilisation.

In Europe it was a similar story, with the PMI manufacturing index rising to 46.0, its highest level in almost a year and Germany's closely watched Ifo business confidence index reaching an eight month high. Even harder economic data were positive, with Germany and France industrial production up 3.7% month on month (MoM) and 2.4% MoM respectively in May. The UK was weaker, with industrial production down 0.6% MoM in May and GDP for the June quarter negatively surprising, falling by 0.8% quarter on quarter (QoQ) and 5.6% year on year (YoY).

Asia was a more positive picture, with hard data showing a strong recovery in economic activity, after this region was hit the hardest during the downturn. China's June quarter GDP was up 7.9% YoY, with estimates pointing to an annualised increase of around 16% for the quarter. On this basis, Singapore's GDP was up by over 20%, while South Korea was up close to 10%. Industrial production data across the region was positive in a similar vein. In Japan, industrial production rose for the fourth consecutive month in June and is now up 16.5% since bottoming in February, although machinery orders fell by 3% in May.

Outlook

There's increasing evidence that the downward economic spiral has been broken and we continue to look for some economic recovery in the second half of this year. However, growth is likely to remain fairly tepid for some time and the world economy still faces some major economic headwinds.

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