Global Business Optimism Gloomiest in 10 Years

Worldwide optimism for growth of business activity, employment, and profits in the coming year has fallen to its lowest since the global financial crisis, according to a report from information provider IHS Markit.

“Sentiment has worsened continually since peaking in early 2018,” Chris Williamson, IHS Markit’s chief business economist, said in release, “with the latest surveys showing a further erosion of confidence amid trade war tensions, wider geopolitical uncertainty, and worries about slowing economic growth or recessions.”

Based on responses from 12,000 companies, the IHS Markit Global Business Outlook Survey, which is released three times a year, shows that the net balance of firms predicting output will rise over the coming year is down to 14%, from 18% in June. Optimism peaked in early 2018 and has since tumbled to reach its lowest since IHS first starting collecting the data in 2009.

The report also noted a significant divergence between optimism among firms in developed and those in emerging markets. Companies in the developed world reported the bleakest outlook for growth since 2009, while the sentiment is more positive in emerging market firms, but still close to its post global financial crisis low.

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Sentiment about future output is down to new survey lows in both manufacturing and services in the developed world. Sentiment in the four largest developed economies has deteriorated, with a particularly steep drop in the eurozone and US, which hit seven- and three-year lows, respectively.

Emerging markets have seen a notable rise in expectations for manufacturing output since June’s report, with a minor improvement in service sector optimism. Among the four largest emerging markets, optimism about business activity over the coming year is up from a decade-low in June but remains the third lowest since the global financial crisis. Sentiment has improved in China, Brazil and Russia, while optimism in India has fallen to the lowest in more than a decade.

The survey found that the outlook for profits, which fell sharply in the June report, declined further in October. Services optimism saw a new survey low although manufacturers are less confident regarding profits than service providers are. Only companies in Japan, China, Brazil and Russia were more upbeat about the profits outlook than they were in June, while steep deteriorations were observed in Germany and Spain.

Job growth expectations have also dropped to their lowest since 2009, while capital spending plans hit their lowest since February 2016. The survey found that planned research and development spending is also weaker. Worldwide manufacturing hiring intentions are at a post global financial crisis low with expected job gains in the service sector at their lowest since early 2016. The UK, Japan, China, Brazil and Russia, however, have countered the global trend by seeing improved employment.

In the US, the report said global trade tensions, the 2020 election, and a tight labor market have weighed heavily on business confidence. Both manufacturing and service sector companies show a lower level of positive sentiment toward future output than they did in June. Employment and profits expectations have fallen to their lowest since February 2016, while selling price inflation expectations have dropped to their lowest since 2017.

Growth expectations in the eurozone also have fallen sharply to their lowest in seven years, while the outlook in manufacturing and services are at their gloomiest in 10 years. Profits for the region are expected to fall for the first time since 2012 and expected rates of non-staff input cost and selling price inflation are at their lowest since 2016.

Business optimism in Japan continues to edge lower from its peak two years ago, while expectations for output have improved in China but remain the second weakest in 10 years.

“Businesses around the world have become gloomier about their prospects,” said Williamson. “The outlook survey data paint an increasingly gloomy picture that corresponds with our forecast for global economic growth to slow to 2.5% in 2020.”

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Tags: business optimism, Chris Williamson, Global Financial Crisis, IHS Markit

Value stocks have finally edged ahead of growth after a long spell of underperformance. For almost three months now, value has outpaced growth: The S&P 500 value index has leapt ahead 12%, compared to 5.7% for the growth benchmark.

Could this be lasting? After all, growth stocks have dominated for the past decade—except for a brief period in 2016 during the oil bust, when recession fears mounted. “Understandably, investors wonder if this move is nothing more than a head fake,” wrote Sam Stovall, chief investment strategist at research firm CFRA, in a research note.

OK, but luminaries ranging from Benjamin Graham to Warren Buffett stand behind value investing as a sure-fire winning strategy in the long run. And statistics show that value has outdone growth over the many decades. So why shouldn’t this natural superiority keep on keeping on today?

Value stocks trade below their intrinsic value, namely what they should be worth given their fundamentals. But fast-growing tech and healthcare stocks have eclipsed them for a long time, and investors have overwhelmingly preferred these momentum plays until recently.

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Lately, though, the climate has changed. Washington politicians’ qualms about the likes of Facebook and Twitter have tarnished some of the tech names’ luster lately. Both companies’ shares are down since July. The negative vibe has arisen thanks to talk, at least from Democrats, about imposing Medicare for all, of shutting private health insurance and clamping down on drug prices.

One other reason the turnaround is happening is that value has become even cheaper. To Cliff Asness, founder of quantitative fund manager AQR Capital Management, investors snubbing of value made sense for many years, but more recently their fundamentals have improved sufficiently to merit a reappraisal. Their earnings have improved but not their prices, which makes for even lower price/earnings multiples.

“Value fundamentals have not come in worse over this recent painful period, it’s prices alone that have gone the wrong way,” Asness said. “When losses are due to price moves, not fundamentals, and occur over shorter periods, that is when things actually cheapen.”

As Stovall emphasized, the value index is trading at a 4% discount to its average P/E since 2003, while the growth index is at a 24% premium. That’s not that investors are exactly shunning growth stocks, he said. Instead, they are including value shares, too.

He said “the market is rotating rather than retreating, meaning that we are seeing a gravitation toward more attractively valued sectors, styles and sizes rather than a cashing out altogether.”

Alas for value, if the economy skirts a recession and keeps rolling, the vaunted investing style’s day in the winner’s circle may fade away, as it has in the past.

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Tags: Cliff Asness, Facebook, growth stocks, S&P 500, Sam Stovall, Twitter, value stocks