Welcome to the May 2019 Investment Outlook provided by US Freedom Capital!
CONTINUED SLOWING OF US ECONOMIC GROWTH
The US economy is growing; however, the pace of growth is slowing. We are clearly shifting to the downside of the business cycle in 2019. The shift in the business cycle is consistent with leading-indicator input and our forecasts.
US Total Industrial Production during the 12 months through March was up 3.8% from the year-ago level. All three major segments of the industrial economy are rising at a slowing pace. Total Industrial Production activity will peak around the middle of this year before declining into early 2020.
Producer Prices are rising at a slowing rate, along with the industrial economy. This trend will likely persist into mid-2020. Although we are not expecting Producer Prices as a whole to decline during this time, prices for certain commodities, including steel and oil, will likely fall from their current levels.
The OECD’s US Business Confidence Index is suggesting that companies’ opinions regarding their current situation and immediate future are growing less optimistic. This indicator, which typically leads Industrial Production by about two to three quarters, is signaling that business cycle decline in the industrial economy will persist through at least much of this year.
Nationwide, Residential Construction is down 0.3% from year ago levels, with both single multi-unit starts declining. However, tax-friendly states such as Arizona, Texas and Florida continue their strong expansion due to internal US immigration.
US/CHINA TRADE WAR
Negotiations between the US and China over a possible trade deal appear to have suffered a setback this past month. The US has since announced raising tariffs to 25% from 10% on about $300 billion worth of imports, although it will take several months for them to be implemented. China retaliated with tariffs of their own, and the US is now considering additional tariffs to retaliate for the retaliation.
US businesses and consumers will see an inflationary effect from this trade war. However, this may be masked somewhat by the current slowing rise in inflation. US companies selling into China may find that their prices are less competitive than those of non-US firms. This could lead Chinese firms to switch from US goods to lower-cost alternatives. Fortunately, the two sides have not broken off communications, and further discussions are planned for June. A trade war harms both countries, although with more pain to the export-oriented Chinese economy, incentivizing both governments to make a deal.
OUR ECONOMIC OUTLOOK (USA)
Our economic outlook remains unchanged, except that we have pushed our negative growth call out one quarter: slowing growth will persist through 2019. We are expecting flat (Texas) and negative growth US) in 1Q 2020 with a strong likelihood it will not meet the formal definition of a recession (two consecutive quarters of negative growth). We expect to return to growth later in 2020.
|US overall||Continued Slowing||Q1 Negative Growth Remainder Growth||Strong Growth|
|Texas||Flat||Q1 Flat Remainder Growth||Strong Growth|
OUR MAY ECONOMIC REVIEW (INDIA)
The highlight for the month of May was the re-election of the incumbent National Democratic Alliance (NDA) party to power with an overwhelming majority. Indian voters voted for stability and economic reforms. This outcome ended the uncertain environment plaguing the economic sentiments over the past few months as anxious investors and business owners waited on the sidelines awaiting the outcome of the elections. The verdict was cheered by market participants as Indian equities rose to lifetime highs while Indian sovereign yields declined.
Indian equities started the month on a cautious note with Foreign Portfolio Investors (FPIs) redeeming $0.5 billion as investors waited on sidelines (until May 23rd). Even domestic investors preferred to wait out the outcome as a change in the regime was seen as a major disruptor to economic sentiments. The month of April and May also witnessed the release of Q4 FY 2019 results from Indian companies. A majority of the companies reported a decline in growth and revenue, indicating a slowdown in the economy. The US-China trade standoff continued to dampen global investor sentiments worldwide with Indian markets being no exception. However, the clear majority for the incumbent government helped soothe frayed nerves and FII’s pumped in $0.2billion (more than 50% of the entire month’s outflows) in the last couple of trading days post elections.
Indian bonds had a similarly underwhelming start to the month as trading and investment volumes remained lackluster with tight liquidity conditions and a spike in crude prices keeping a lid on price movements. FPIs echoed the sentiments on the ground, redeeming nearly $0.35 billion as the new 10-year benchmark yields hovered between 7.35%-7.4% for the month (until May 23rd). Post elections the markets witnessed a complete turnaround helped by FII inflows of $0.2 billion in the previous couple of trading session post elections, as 10-year yields fell to 7.16% (until May 27th).
The Indian rupee remained relatively resilient for the month, firmly trading above the 69.50 handle, only gaining a few basis points post elections. The US-China trade standoff, as highlighted earlier, along with crude hovering consistently above the $70 per barrel kept bullish rupee sentiments in check.
OUR MARKET OUTLOOK (INDIA)
With elections over, markets would now await the release of the Q4 2019 GDP data due on 31st May as well as the RBI’s monetary policy on 6th June. Market participants will also keep a keen eye on the appointment of the Finance Minister as well as the Union Budget for FY 2020. An announcement of liquidity enhancement measures like a cut in CRR and benchmark rates are expected to aid bullish bond market sentiments and benchmark yields may hover around the 7% mark. Indian equities are expected to trade sideways as the underlying economic undercurrents warrant caution with valuations remaining high in relation to revenue and volume growth and market euphoria on election outcome may evaporate quickly as economic fundamentals take precedence.
Indian Equity Performance
|Nifty MID-CAP Index||3.07%||-5.54%|
|BSE Small-Cap Index||2.51%||-14.16%|
|IN 10 Year Yields (27th May'19)||7.16%|
|IN CPI (Mar'19)||2.86%|
|IN GDP Growth (Oct-Dec'18)||6.60%|
INVESTMENT OUTLOOK (USA)
We see US real estate continuing as a superior investment for our offshore investors, as this asset class is an incoming producing hedge against inflation and a hedge against the increasing volatility of the equities markets. Texas will continue to benefit from the fallout from the 2017 Tax Act, as companies in high tax states are faced with significantly higher local taxes in 2018 and beyond and many make the choice to relocate to states with low or zero state income taxes.
With continued job creation and in-bound migration, we continue to see for-lease apartment development to be an attractive investment target, although construction costs continue to be a major challenge in finding new development opportunities.
Our best wishes for your health and prosperity.
US FREEDOM CAPITAL
|David E. Gunderson
Chief Investment Officer
Deputy Chief Investment Officer (India)
US Freedom Capital is an investment manager offering US real estate investments to global investors. The offerings are structured either for financial return or for immigration by investment utilizing the EB-5 Investor Visa.The company operates worldwide from offices in Dallas, Dubai, Mumbai, São Paulo, and Washington DC. The leadership of US Freedom Capital include both the former Director and Acting Director of Immigration and real estate executives with over $3 billion of real estate investment experience.