The global economy in five charts
The US is the standout performer among global markets while Australia remains overvalued, according to the latest Morningstar Markets Observer.
The IMF expects the world economy to grow by 3.9 per cent this year and next, despite rising oil prices and trade tariffs. The stand-out success of the past quarter is the US economy, which has grown strongly over the three months. The 10-year government bond yield has ticked up, now paying out considerably more than its European counterparts.
In terms of stock market returns, Russian companies outperformed despite geopolitical headwinds. Australian equities also fared well, but the stock market is now considered to be overvalued, according to Morningstar analysts.
Russia outperforms
Most stock markets across the globe covered enjoyed positive returns over the three months to the end of June, some in the double-digits. Russia gained nearly 32 per cent in the period, the biggest rise among countries covered by Morningstar analysts, while Greece equities fell more than 9 per cent. Robust economic growth propelled US and major European stock markets, but Spain and Greece lagged because of ongoing debt and political issues.
Australia now overvalued
After a strong 2018 year to date, many of stock markets are now considered overvalued by Morningstar analysts. According to price to fair value estimates, Australian stocks are the most overvalued, followed by Norway, Colombia, France, Peru and Germany. US stocks are slightly overvalued. China, South Korea, Mexico, Spain remain fairly, or under-valued.
US GBP stronger in Q2
The US economy grew 4.1 per cent in the three months to the end of June, making it the best Q2 performance by the US economy in four years. Export growth accelerated in the time period, although some economists argue that this is due to companies bringing orders forward before retaliatory tariffs kick in.
US bond yields out in front
US Treasuries now have one of the highest government bond yields in the developed world. At 2.9 per cent, the 10-year Treasury yield is 2.6 percentage points above Germany. Italian and UK rates have risen, while German and French rates have declined.
The US yield is higher than those in Eurozone because the Federal Reserve is way ahead of the European Central Bank in monetary tightening: the Fed is expected to raise interest rates four times this year, whereas the ECB is planning to phase out quantitative easing from 2019 onwards. The Bank of England raised interest rates in August 2018 but its next move is uncertain.
World growth still strong
Global growth remains robust in 2018 and this is expected to continue in 2019 despite rising oil prices and the risks associated with an escalating trade war. The International Monetary Fund is expecting growth of 3.9 per cent in 2018 and 2019. India's economy is expected to expand by 7.3 per cent this year and 7.5 per cent the next, while China's growth is forecast to slow down to 6.4 per cent next year from 6.6 per cent in 2018.
James Gard is a Morningstar editor, based in London.
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