If anything, the prospects for global growth have started to lessen further in recent weeks. After miserable economic readings from China, extraordinary measures taken to halt a big stock decline, and a devaluation of the Chinese currency, no one should believe their economy is growing at the “official†level of seven percent. Europe also just posted worse than expected second quarter GDP growth even as the continent is about to finalize the latest “extend and pretend†bailout for Greece.
Elsewhere in Asia, the Japanese central bank just lowered their forecast for growth this year to 1.7% from two percent previously. Korea just posted their worst quarterly growth readings in six years and Australia continues to suffer because of the collapse in commodity prices including that for iron, copper and coal.
Investors should be doing what they can to help insulate their portfolios from these headwinds. First, I am heavily underweight the energy & commodity space right now. The Bloomberg Commodity Index is at 13-year lows and oil just touched levels not seen since the tail end of the financial crisis. With the dollar continuing to strengthen and the global economy weak; this pain could go on for quite some time. Before all is said and done, there will myriad additional bankruptcies throughout the energy and mining sectors. I want no part of that and feel it too early to try to “bottom fishâ€. Commodity-based economies like Brazil, Australia, and Canada will also continue to be under immense pressure.
American multinationals that get a large percentage of their overall sales from outside the United States have seen some major currency hits that have impacted both revenue and earnings growth. This is likely to continue for the next couple of quarters especially with China recently devaluing the Yuan which is also helping to weaken currencies across Asia.
I would avoid or underweight names like IBM Corp. (NYSE: IBM), McDonalds (NYSE:MCD), Johnson & Johnson (NYSE: JNJ) and other large firms that get a large proportion of their revenues overseas. The combination of weak demand and a strong dollar is likely to continue to push down revenues and earnings for quarters to come.
