H: Global Snapshot April 2012: Global leading indicator yet to confirm real money slowdown

A leading indicator of global industrial output growth derived from the OECD’s country leading indices rose further in February, consistent with economic news remaining firm at least through May. A fall in global real narrow money …

expansion since November 2011 suggests that output momentum will slow after May.

• Within the global measure, a leading indicator for the “E7” large emerging economies remains stronger than its G7 equivalent, suggesting that emerging equity markets will sustain their year-to-date outperformance of developed markets. The E7 leading indicator also tends to correlate positively with industrial commodity prices.

• The prospect of a global economic slowdown later in 2012, as suggested by monetary trends, raises the issue of whether investors should position portfolios defensively. The bias here has been to delay such a defensive shift until the monetary warning signal is confirmed by a fall in the leading indicator. Such a strategy would have been “safe” in recent years; indeed, most significant equity market declines were preceded by the indicator turning negative, not just changing direction.

• The liquidity backdrop for markets still seems supportive. Annual growth of global real narrow money remains above that of industrial output, a condition that has historically been associated with equities outperforming cash. (Six-month growth rates, however, have crossed, so the annual calculation may give a “sell” signal later this year.) Aggregate bank
reserves in the major economies, meanwhile, have reached another new record, reflecting a recent injection in Japan.