Global Economic Growth Concerns Resurface: 5 Safe Picks
Zacks Investment Research | Apr 09, 2019 09:07PM ET
After a disappointing 2018, U.S. stock markets bounced back in January 2019, leading to impressive gains for each of the three major stock indexes in the first quarter. However, volatility seems to have crept back into Wall Street.
Concerns over slowing global growth have contributed to this uncertainty and dented investors’ confidence to some extent. On Apr 9, both the Dow and the S&P 500 posted their worst session since Mar 22, while the Nasdaq Composite recorded the largest single-day drop since Mar 27.
IMF Lowers Global Growth Forecast
On Apr 9, the International Monetary Fund (IMF) reduced global economic growth forecasts for 2019. This was the third reduction in the last six months. The new growth projection is 3.3% compared with 3.5% projected in January and 3.7% forecast in October. For 2020, global growth is pegged at 3.6%.
The projection for U.S. economic growth was reduced to 2.3% from 2.5%. Eurozone’s growth projection was pushed down to 1.3% from 1.6% while the GDP growth forecast for Canada was decreased to 1.5% from 1.9%. However, China’s economy is estimated to grow 6.3% versus the prior estimate of 6.2%.
Notably, on Mar 20, the Fed lowered the U.S. GDP growth rate to 2.1% in 2019 from 2.3% projected in December. On Mar 4, the Chinese authority pegged the country’s growth rate in the range of 6 - 6.5% for 2019. On Mar 7, the European Central Bank lowered its 2019 growth projection for the Eurozone to 1.1% from its earlier projection of 1.7%.
The IMF cited trade-related conflict, likelihood of a tighter monetary policy by the central bank, especially the Fed, appreciation of U.S. dollar prices and geopolitical concerns such as Brexit and middle-east problems are near-term challenges.
U.S. Trade Tensions Heighten
The year-long trade conflict between the United States and China is yet to resolve. Although significant positive developments have been achieved in this year, a major area of conflict, which deals with protection of U.S. intellectual property, is still under negotiation process. Notably, China is the largest trading partner of the United States commanding 16% of U.S. global trade.
On Apr 8, the U.S. Trade Representative proposed to levy tariffs worth of $11 billion on Eurozone products. An array of products including large commercial aircraft and parts, dairy products and wine will fall under U.S. tariffs.
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This is a retaliatory measure to what the Trump administration believes are illegal subsidies that the Eurozone countries provide to Airbus. This will impact sales of U.S. made aircraft. However, the European Union (EU) has strongly objected to White House and threatened to impose retaliatory tariffs.
The U.S. government has already imposed 25% tariffs on imported steel from Eurozone and 10% tariff on imported aluminum. The EU has retaliated with $3 billion of counter tariffs on U.S. exports. Moreover, President Trump has threatened to levy 25% tariffs on EU auto products. Notably, the U.S- EU trading relationship is worth more than $1 trillion per annum.
On Nov 30, the United States, Canada and Mexico had formed a new trade and tariff agreement called United States Mexico Canada Agreement (USMCA) to replace the old North American Free Trade Agreement (NAFTA). However, approval of the USMCA by the U.S. Congress is not certain as majority House Democrats and a key Senate Republican have expressed concerns over the deal. Notably, both Canada and Mexico constitute 30% of U.S. global trade.
Our Picks
At this juncture, investing in defensive sectors such as utilities, telecom and consumer staple will be fruitful. Defensive stocks are generally immune to the vagaries of the economic cycle. That’s because these companies provide basic services like electricity, gas and water, which can never go out of demand. We have narrowed down our search to five stocks with a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research
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