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We discuss the US economy often because it is a critical component of our fundamental investment process. The profit growth of the companies we invest in is very much dependent on the health of the economy. Currently, the US economy is in good shape:
- 2019 real GDP is forecast to grow 2.3%
- Unemployment rates are below 4%
- Consumer confidence remains elevated
- Inflation is at or below Federal Reserve targets
In general, the US economy is still expanding, the consumer is still spending and interest rates/inflation are under control. This is an economic backdrop that is constructive for the stock market.
We also need to analyze how global economies are performing for the following reasons
- The US companies we invest in sell a lot of goods and services overseas
- The international companies we invest in are dependent on their own local economies
The Eurozone economy is the second largest economic area in the world behind the US. Right now the health of their economy is much more in question than the US. You can see in the chart below that Eurozone GDP growth has been decelerating for 5 straight quarters and is only forecast to grow 1.3%, well below the US:
In addition, internal economic metrics within the Eurozone are not that great:
- Both manufacturing and services metrics in the Eurozone have weakened
- Unemployment rates remain above 7%
- Consumer confidence levels are still negative
The culmination of all this resulted in the IMF (International Monetary Fund) lowering its Eurozone forecast from 1.6% to 1.3% in 2019.
Due to this weaker economic outlook in the Eurozone, the GI Investment Committee made the decision to reduce the G40i portfolio exposure in the new Portfolio Tilt Series models. The G40i’s investable universe of global blue chip dividend paying stocks tends to be heavily weighted towards Europe and the UK. With the resolution of Brexit still undetermined, the potential of further trade disputes, and specific weakness in both Germany and Italy we feel it’s prudent to lower our exposure to this are of the world.