THOMAS WHITE INTERNATIONAL
GLOBAL ECONOMIC OVERVIEW | JANUARY 2016
Capturing Value Worldwide®
KEY TAKEAWAY
The U.S. economy
expanded less than
expected during the last
quarter of 2015, largely on
lower inventory buildup
and reduced business
investments. The Japanese
economy is estimated
to have declined during
this period, while the
Eurozone maintained its
modest growth pace.
Growth in China matched
expectations, but there are
increasing concerns about
currency volatility and
capital outflows from the
country.
Global Economic Growth Optimism Shines Less
Bright
At the beginning of the year, financial markets have become less optimistic about the global
economic growth outlook and the ability of policymakers to support a sustainable revival. The U.S.
economy expanded less than expected during the last quarter of 2015, largely on lower inventory
buildup and reduced business investments. The Japanese economy is estimated to have declined
during this period, while the Eurozone maintained its modest growth pace. Growth in China matched
expectations, but there are increasing concerns about currency volatility and capital outflows from the
country. Large resource exporting countries such as Russia and Brazil remain in recession, while Australia
and Canada continue to face slow growth.
Markets have also become less confident about the ability of central banks to expand their
quantitative easing measures and revive economic growth. Inflation remains substantially below
target in the Eurozone and Japan as gains in consumer demand have only been modest, despite the
strengthening labor markets. Nevertheless, the Japanese central bank’s decision to charge interest
on reserves maintained by commercial banks as well as additional policy support from the European
Central Bank could help their economies. It is now considered unlikely that the U.S. Federal Reserve will
continue with the schedule of rate hikes indicated in its last announcement in December.
Global equity prices declined in January across all regions, and most sectors. The global manufacturing
continued to expand in January, though most emerging countries reported weak output data. Global
services output remained relatively healthier, as activity continued to expand even in emerging
countries such as China.
GLOBAL INDUSTRY SPOTLIGHT FOR THE MONTH: TECHNOLOGY
In recent weeks, the revenue and earnings growth outlook for the technology sector has
come under a cloud and analysts have become more cautious about their projections.
The declining frequency of transformational products and services, growing consumer
indifference towards product updates, as well as rising competition from smaller players
have dulled the revenue growth rates. At the same time, economic growth uncertainties
are discouraging businesses from scaling up their technology spending. Nevertheless, the
longer-term demand growth outlook for the global technology sector remains fairly robust.
The technology sector continued to attract positive investor attention in recent years, even as the
cyclical industries struggled with uncertain demand trends. The sector saw attractive revenue and
earnings growth, as well as healthy cash flows, dispelling many of the concerns investors had from the
internet bubble era before the turn of the century. As new products such as smart phones became
indispensable for most consumers, the revenue growth potential expanded several fold. As volumes
increased, these products became more affordable to a wider global audience and helped sustain
the sales gains.
www.thomaswhite.com
GLOBAL ECONOMIC OVERVIEW | JANUARY 2016
KEY TAKEAWAY
In recent weeks, the
revenue and earnings
growth outlook for the
technology sector has
come under a cloud and
analysts have become
more cautious about their
projections.
On the services side, growing internet use across the globe brought unprecedented opportunities in
online advertisements, instant communications and entertainment. The early leaders that were able
to build and retain large user bases saw rapid growth in revenues, earnings and their stock valuations.
As networks became more robust and reliable, business services such as cloud storage and remote
infrastructure management became popular.
Nevertheless, investors have recently become less optimistic about the growth potential of some of
these segments. It is feared that new versions of products such as smartphones and tablet computers
will not be sufficiently compelling for consumers to trigger a purchase. The added capabilities, design
features and other innovations could appear incremental, and not cutting-edge, compared to earlier
versions. This could lead to market saturation where the product replacement cycle is extended, as it
happened for televisions, personal computers and other products.
Companies that deliver services over the internet or on mobile phones have attracted much higher
valuations, compared to product manufacturers, as their growth models are less dependent on
continuous and repeated product innovation. Some of these companies have user bases that
run up to several hundred millions, which could offer significant and possibly enduring competitive
advantages. However, even in the services space, doubts about profitable growth are growing.
While it is acknowledged that the revenue growth potential remains healthy, the possibility of margin
improvements have become less certain. This is more so for online entertainment companies that have
expanded their development budgets of original content in recent years.
Despite these mostly valid concerns, the longer-term potential for the technology sector appears
largely intact. While the success of individual companies could depend on consumer acceptance
of new products and services, the sector itself could see sustained revenue growth in the future.
Wider acceptance of faster internet connections could continue to drive demand for more capable
devices, especially in countries such as China and India. The consumer markets in these countries are
relatively less saturated, though they are more price conscious.
Similarly, much of the global growth in online services is probably yet to happen as changes in
consumer behavior continue to favor internet and mobile-based platforms. If the recent growth in
online shopping, social media and online entertainment in the developed countries is repeated in
the emerging countries with larger populations, the growth potential could be enormous. Considering
the spending power of the average consumer in these markets, and rising competition, future growth
would likely come with lower profit margins. Technology spending by businesses could also accelerate
in the future, as the need for efficiency gains encourage the adoption of newer and technology
intensive processes.
This publication is for informational purposes only. This publication is not intended to provide tax, legal, insurance
or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any
investment, security or other product or service is appropriate for you based on your personal investment objectives
and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax
situation. The information contained in this publication does not, in any way, constitute investment advice and should
not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that
any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White
International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with
respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
FORWARD LOOKING STATEMENTS
Certain statements made in this publication may be forward looking. Actual future results or occurrences may
differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White
International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
www.thomaswhite.com | © Thomas White International Ltd, 2016