Geopolitics continued to darken this week. Unrelated (hopefully) to the US stepping up sanctions against Russia this week for ongoing support of separatist aggression in the Ukraine, a Malaysia Air airliner was downed near the Russian/Ukraine border. There are many troubling aspects to this tragedy and so far little hard evidence. Only recently have the Pro-Russian separatists allowed investigators safe access to the site raising questions. How would separatists have the type of weapon needed to shoot down a plane flying above 30,000 feet? Answers could create further friction at seriously stressed fault lines.
In addition, Israel began a ground incursion into Gaza after waiting for as long as they could for targeted airstrikes to stop deadly rocket launches into their territory. Tunnels have been found where Hamas militants are seeking access beyond Israeli borders. Prime Minister Netanyahu is likely to broaden the initiative to ensure that relative peace can be restored.
Across all the conflicts that continue to brew, we are hopeful that leaders can work to resolve and contain the unnecessary violence. At this point in society, it should be understand that the costs, both human and economic, far outweigh any perceived benefit.
On the economic front, there were a couple of noteworthy items that occurred this week. In the emerging markets, China posted second quarter GDP growth of 7.5%. Not shockingly, this is right on target with government projections and a little above economist’s projections. Many were quick to pounce on the growth in government spending citing the leadership’s fall back to “Ol’ Faithful.” While China has been particularly careful to avoid the word stimulus in projects this year, they have been active in supporting projects across provinces. While China continues to see their policies cause real estate prices to fall in more and more cities, they are working to support initiative across energy and healthcare which support an evolving economy. It is reported that the second corporate bond default in local markets is expected again reinforcing that policy makers seek to remove moral hazard. All in all, the road is bumpy and long that leads to sustainable growth. Also announced this week, the BRICs acted to establish their own development bank with $100bln fund. The headquarters is expected to be in Shanghai with the first president of the organization from India. Feeling as though their concerns are not being adequately acknowledged in larger forums, it appears the BRICs countries are taking matters of stability and development into their own hands.
In the developed world, there have been deals, deals, and more deals. Each morning we awake to several notifications of deals announced overnight. Whether it be Fox’s bid for Time Warner, Reynolds play for Lorillard, or AbbVie seeking tax haven by acquiring Shire, it seems C-suite executives are confident in deal-making. Corporate growth seems to be improving. With only 9% of the S&P 500 reporting so far, sales have grown 2.8% and earnings 9.5% year-over-year. While the market action recently has been less than inspiring (the S&P 500 had its first greater than 1% move in either direction in 62 days, unfortunately to the downside), we continue to maintain risk levels in the portfolios.