Charles Schwab Investment Management on Thursday held its CIO midyear market outlook conference call, expressing optimism for equities and developed markets while predicting a Fed rate hike in the fourth quarter.
Omar Aguilar, chief investment officer for equities, said that global equity markets are facing a significant headwind due to the global market slowdown. In the U.S., Aguilar said, the first half of the year was "pretty soft," with "very disappointing" consumer spending, despite a stronger dollar.
"Everything when we look at the data for the first half suggested that our economy, while it stayed on trend, it was not as fast growing as everybody expected."
In the rest of the world, particularly developed markets, volatility was high. He predicted that will continue into the second half of the year, and added that he's optimistic that at the end of the year equities will have a positive outcome "mostly because we expect the economy in the U.S. to be rebounding from the first half of the year."
Aguilar said, "Between Greece, Europe, the ECB monetary stimulus, the Bank of Japan, Russia and China, we basically make Iran the best news that we've seen so far."
He said the "unprecedented stimulus programs" in Europe and Japan in the first half of the year have worked as expected. "The volatility of those markets has gone down. The real yields on their government bonds have actually gone to negative territory in some cases, and the overall volatility of their equity markets has gone down, and as a result, their equity markets have gone up significantly higher than what we have in the U.S."
Events in Greece, however, built up a headwind in Europe and around the world, Aguilar said, "because people have concerns about the outcome, more politically than economically." He said that equity volatility increased following negative news about the situation there, but generally, the markets went back to where they were following positive news.
Emerging markets, however, are "not in the best shape." Following the 2008 crisis and subsequent QE programs, Aguilar said "we saw a lot of liquidity flow into emerging markets. For five years until 2013, a lot of global growth was basically the result of emerging markets."
Once the QE program ended in the U.S., though, "we saw a significant amount of volatility in those emerging markets."
He called China the "big one," citing concerns about the deceleration of its economy and "lately, the situation with their stock market." He said that the Chinese government's efforts to switch from an export-driven economy to more domestic-driven growth present a lot of challenges.
"They have a lot of tools and they've made a lot of progress," he said, "but that has translated into excessive inventory and excessive extra output that they still need to offload."
China's economy was expected to grow 7%, but "they're struggling to get to that level."
Those challenges, combined with struggles in Brazil and Russia and a stronger dollar, it creates a "very difficult hurdle for them to continue to perform well."
India, however, is "moving in the right direction," he said, "but it's only one of those main emerging markets that seems to be doing well."
