Don't Fight the Central Banks

Guild Investment Management |

European measures of business sentiment from and consumer confidence from the European Commission are up in the last week.

European QE is ongoing, and we note that European stocks are reacting positively to European sentiment. In spite of the Greek issue, the stocks on the continent are doing nicely. Fed Chair Yellen encouraged investors everywhere when she stated on Friday that interest rate increases in the U.S. would be slow.

We believe export companies with decent dividends will shine. Some stocks and ETFs we own for clients include SAP SE (SAP) , WisdomTree Europe Hedged Equity ETF (HEDJ) , and iShares MSCI Germany (EWG) ; remember to hedge the Euro.

Japanese wages are rising slowly, GDP is improving, and most importantly, the Yen is once again declining. Foreign tourists from Asia are invading Japan to buy Japanese products and enjoy the sightseeing. The Chinese are ubiquitous in Japan, and they come to shop as well as sightsee. We anticipate a pickup in second-quarter Japanese GDP, and stronger-than-expected retail sales. If you want to buy Japan, consider WisdomTree Japan Hedged Equity ETF (DXJ) , a hedged Japan ETF; also consider the robot maker FANUC. We own them for some clients. Japan has had a move for some time, but the fundamentals of the economy and the increasing number of Japanese pensions and other institutions preparing to buy stocks both argue that stocks can move higher long-term.

China’s Gift to the World

China has given the world stock markets a big gift. As we know, China has been clamping down on real estate speculation for about two years. Part of the reason for that is the wild behavior of many regional governments and their leaders. In effect, they were entering into many real estate projects that would not be finished but would provide substantial ill-gotten gains for the regional officials.

Simultaneously, President Xi and his associates have been severely cracking down on corruption, placing numerous officials -- some of high rank -- under house arrest. This purge of corrupt officials has pleased the public and has allowed the President and his associates to remove some restrictions on second home purchases. The idea is that corrupt officials have stopped their acquisition of homes, as it draws attention to where they got the money.

President Xi said recently that China can grow and leverage policy tools to do so. Soon after, required down payments on second home purchases were lowered to 40 percent from 60 percent. First home purchases from the national provident fund fell to 20 percent from 30 percent. Real estate speculation by the public may heat up modestly. We do not expect a big boom, now that wealthy government officials are afraid to participate.

Secondly, People’s Bank of China governor Zhou Xiaochun spoke about needing to guard against deflation. It is obvious that the government wants to reflate the economy and send their stock market higher, in order to stimulate the transition that has been going on for several years from a manufacturing-led to a consumer-led economy. Higher stock prices and higher real estate prices create higher consumer spending, and that is what the politburo wants to do -- stimulate the economy and raise the GDP growth rate by stimulating the consumer.

New stock brokerage accounts are being opened at a record pace. Stocks in Shenzhen and Shanghai are rising fast. It will likely continue, and will be encouraged by the government.

Buy China -- we own it and we are buying more.

Investment implications: Japanese QE is ongoing, European QE is ongoing, and China and India are cutting rates. Many other authorities in the world are lowering their currency values. This is a prescription for higher stock prices in Europe, China, and India. A rising U.S. Dollar will attract money to U.S. stocks, and U.S. markets should continue to perform tolerably well, even if they do not outperform markets in Europe and Asia.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
SAP SAP SE ADR (Sponsored) 87.76 -0.55 -0.62 528,801


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