At the beginning of the year I had a rosy view of how 2015 would play out:
1. The United States economy would grow close to 3 percent and the unemployment rate would drop below 5 percent.
2. The Standard & Poor’s 500 would rise more than 10 percent by Christmas.
3. With some monetary and fiscal help, Europe and Japan would grow more than 1 percent.
4. After turbulent negotiations, Greece would stay in the European Union and maintain the euro as its currency.
5. There would be a deal with Iran on its nuclear development programme that would be both credible and enforceable but nobody would like it.
6. The Chinese economy would slow and the stock market there would be dangerously overvalued, but while China would not be the engine of growth it had been for the past decade, its reduced pace would not destabilise the world economies.
Events
Then, as we entered the second half of the year, each aspect of this outlook began to run into trouble.
We are at a point when various macroeconomic events could have a significant impact on the financial markets. Here are my thoughts on recent events in Greece, the Iran negotiations, China and the United States.
I have a somewhat different view of the Greek situation from the consensus. Most observers believe Alexis Tsipras was forced to give in on all of the demands of the International Monetary Fund, the European Central Bank and the European Commission and that he is in serious political trouble as a result. My assessment of the situation is that, in the eleventh hour, Tsipras correctly concluded that Europe would, for a number of reasons, do almost anything to keep Greece in the European Union. The first is the fear that there would be contagion in the southern-tier countries like Spain and Portugal, who might believe their economies would improve if they had control of their own currencies, and the European “project” would die. The second is that a Greek default would destabilise the financial health of Europe generally, and the fragile economic recovery taking place there would be aborted.
While Tsipras would appear to have capitulated on his anti-austerity programme, he did keep Greece in the European Union, kept the euro as its currency and secured a third bailout of over $96 billion (Dh352 billion). He has obtained what the Greek people wanted: money to move forward and continuing membership in the European Union with the euro as Greece’s currency. The story is not over. The Greek economy is in shambles and the prospect of running a budget surplus is dim. While the current deal buys some time, we may be wringing our hands about Greece six months from now.
Iran
In spite of the complexity of the issues, a deal with Greece resulted from two simple objectives: Europe’s intent to avoid a destabilising default by a member of the Union and a desire by Greece to get a third bailout and keep the euro. The Iran talks reached an agreement because of two similar controlling factors:
(i) The international community wants to delay the Iranian nuclear development program as long as possible.
(ii) While Iran has been able to “work around” its inability to import many critical goods, the sanctions still are hurting and the general population wants them lifted. More than half its 78 million, largely educated, population is under 35 and is anxious to participate in the economic opportunities it sees elsewhere in the world.
As a result of these two factors, an agreement (not a treaty, which would have to be approved by the Senate) was signed. Neither side will be fully satisfied (another similarity with the Greek situation) and the deal is unlikely to be viewed as a legacy achievement of the Obama presidency, but it will be judged as an accomplishment over the near term.
China
In the case of China, any analysis needs to recognise that the country has only limited experience with capital markets.
In my view, the participants in the market were largely speculators. The stock exchanges were mainland Macaus. There were four million new accounts opened in each of the months immediately before the decline started and margin debt was at a record high, representing about one quarter of the peak value of the market; this margin debt has declined in line with the market correction. The 90 million people who participated in the market represented 7 percent of the population. While China has a high debt to gross domestic product ratio, it also has large foreign reserves and a powerful industrial base capable of generating a budget surplus. In the US, the unemployment rate has dropped to 5.3 percent, but that is partly because of the decline in the participation rate.
US growth
I continue to believe a lack of demand is the biggest problem for the US economy.
After the 2008-9, recession many government entities reduced their spending, but now are contributing to the growth of the economy. The federal budget deficit is running below 3 percent, so authorities are in a position to increase expenditures on infrastructure, job training and research and development. The approval of these programmes by a sharply polarised Congress is difficult to achieve. As a result, the US economy is likely to grow at a rate closer to 2 percent than 3 percent for the remainder of the year, but there is no recession in sight. When the Federal Reserve starts raising interest rates, if it ever does, the increases will be small and intermittent. Currently, we see little inflationary pressure. I do not believe the market is overvalued. At 2100, the Standard & Poor’s 500 is at 17.5 times $120 in estimated 2015 operating earnings, slightly above the long-term average. Estimates for next year are $130, putting the multiple a little above 16. I am still optimistic about the outlook for the US equity market for the remainder of the year.
By Byron Wien
Byron Wien is the vice-chairman of Blackstone Advisory Partners LP.
