Economy
Stock Market Faces Earnings Shock as Economy Falters: MLIV Pulse – BNN
(Bloomberg) — Don’t let optimism among equity analysts fool you: Earnings forecasts are likely to be slashed as spiraling inflation and rising interest rates put the brakes on spending.
That’s the view from the latest Bloomberg MLIV Pulse survey, with 65% of 629 respondents saying analysts are “behind the curve” factoring in the damage.
The survey results — which skewed heavily toward people in the US and Canada, with 62% primarily based there, followed by 21% in Europe — echo warnings elsewhere that consensus estimates are too optimistic. Morgan Stanley’s Lisa Shalett has likened forecasters to “deer in headlights.”
“Analysts might have some catch-up to do in terms of thinking about economic growth,” said Anna Macdonald, a fund manager at Amati Global Investors Ltd. Many companies are set to face a downturn in demand, having only just restocked their inventories at higher prices due to supply chain disruptions, she said by phone. “The hit to corporate earnings could be quite rapid and quite extreme.”
It’s not just pros, though, who are pessimistic: a large chunk — 36% — of the survey respondents identified as retail investors.
If a recession indeed arrives, survey takers predict stocks may take a hit, with 57% seeing an economic contraction as a greater risk to equities over the next year than higher yields triggered by sticky inflation. Retail investors were the only group identified in the survey that worry less about recession than about inflation pushing yields higher.
That may partly be because the retail investors in the survey were predominantly based in the US and Canada, while Europeans were more concerned by recession than North Americans. Almost two-thirds of respondents in Europe, where the European Central Bank has yet to start raising rates, identified recession as a greater threat. In the US and Canada, that number was 55%.
Typically during a recession, S&P 500 earnings drop about 13%, according to Goldman Sachs. Within four quarters, they’ve usually only recovered by 17%, the bank’s strategists said in a note. Market rebounds are also slow, with the S&P 500 taking more than 1,000 days to recover from plunges during the dotcom and global financial crises, according to data compiled by Bloomberg. The bounce-back was faster during the Covid-19 pandemic, however.
According to strategists at Sanford C. Bernstein, 12-month forward earnings in US and Europe have risen 7% over the past six months. The MSCI World equity index, meanwhile, has plunged more than 20% as economists like those at the Organisation for Economic Co-operation and Development slashed growth forecasts.
Though they remain largely optimistic, equity analysts are becoming more cautious on earnings. An index from Citigroup Inc. tracking weekly estimate revisions has been mostly negative for the past four months. And strategists at JPMorgan Chase & Co. last month cut estimates for large-cap US technology firms.
Away from stocks, meanwhile, MLIV Pulse survey respondents are still relatively upbeat on the dollar’s prospects, even after the US currency’s recent strength. Some 35% of respondents said the Bloomberg Dollar Spot index will rise in the third quarter versus 24% who think it will fall.
Respondents to the April MLIV survey predicted the dollar index would continue rising. Since then, it’s gained about 5% as the Federal Reserve became more aggressive on rate hikes.
The dollar should “remain on a stronger footing” as high inflation persists, Derek Halpenny, MUFG Bank’s head of European global markets research, told Bloomberg Television.
©2022 Bloomberg L.P.
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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