Capture the Trending Pickup in Global Growth

by:
Portfolio Strategist, MainStay Investments

The global economy is growing beyond expectations, driven by increases in consumer spending and – importantly – business equipment spending broadly across the world (Figure 1).

Figure 1: Global Capex Improves

Global Capex Improves

Source: Bloomberg, as of 10/30/17. *Ex. Defense and Aircraft spending.

For most of the eight-year recovery from the global financial crisis, the U.S. was the primary engine of global growth. The debt crisis in Europe, stagnation in Japan, a feared slowdown in China, and a slump in commodities each posed headwinds, while cautious corporations favored cash and stock buybacks over investment in new equipment. Today, however, a synchronized improvement in economic activity, led by increased consumption and capital expenditures, pushes global growth above expectations.

Why Does It Matter?

Rising capital expenditures and increased global growth have a direct impact on productivity, corporate revenues, and profitability. Capital investments tend to boost productivity, helping to curb unit labor costs and critically driving a firm’s success and profitability. Global growth and increased consumption lead to improvement in sales. The combination creates a much-improved economic outlook.

Where Is the Opportunity?

The Strategic Asset Allocation & Solutions Group (SAS) looks for opportunities to generate alpha across value, sentiment, momentum, and the economic cycle. Using these indicators, international investments look appealing today – particularly in Europe and Japan.

Both Europe and Japan are in the earlier stages of their economic expansions, and cyclical indicators of the business environment are moving in a sustained uptrend (Figure 2), while their respective equity valuations, relative to the United States, are cheaper than long-term averages. These opportunities, coupled with strong price momentum and strong earnings momentum (Figure 3), lead us to favor international equities.

Figure 2: Business Conditions at Cycle Highs

Current Business Barometer (Japan and Europe)

Business Conditions at Cycle Highs

Sources: Thomson Reuters Datastream, New York Life Investments, as of 10/30/17.

Figure 3: Momentum on Its Side

Momentum on Its Side

Sources: Thomson Reuters Datastream, New York Life Investments, as of 10/30/17.

Both Europe and Japan also benefit from extremely accommodative monetary policy and ongoing structural economic reforms. Dovish comments from the European Central Bank (ECB) last week reduced some fears of early tapering. The re-election of Prime Minister Abe in Japan is an encouraging sign that long-running economic reforms will continue.

One Risk to Our View Appears Limited for Now

A slowing China is often pointed to as a concern for global growth, and rightfully so. The world’s second biggest economy demands many commodities, goods, and services from other countries.

Importantly, however, China’s economic growth continues to exceed expectations of a sharper slowdown. Economic growth reached 6.8% in the third quarter. And last month, continued double-digit growth in retail sales reaffirmed the shift to a consumer-driven economy (Figure 4). The new consolidation of power, following the Communist Party Congress last week, may allow President Xi to push for further structural reforms.

Figure 4: Chinese Retail Sales Maintain Trend

Chinese Retail Sales Maintain Trend

Sources: Thomson Reuters Datastream, New York Life Investments, as of 10/30/17.

Implementation

While there are multiple ways to capture the trending pickup in global growth, SAS is using incremental investment in equity as an opportunity to increase international exposure with a 50% currency hedge. The recent rebound in the U.S. dollar from September lows can be explained by a higher likelihood of rising interest rates here in the States. At these levels, we do not see a continued rally in the dollar. That said, currencies can be elusive. And, a very tight labor market in the U.S. could lead to a pickup in inflation, warranting a more rapid tightening of monetary policy, which, in turn, would likely result in a stronger dollar – hence, the preference for a partially-hedged vehicle.

 

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

This material is provided for educational purposes only and should not be construed as investment advice or an offer to sell or the solicitation of offers to buy any security. Opinions expressed herein are current opinions as of the date appearing in this material only.

Active management is an investment strategy involving ongoing buying and selling actions by the manager. Active managers purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active management typically charges higher fees than passive management.

Alpha measures a fund’s risk-adjusted performance and is expressed as an annualized percentage.

Commodities are investments in instruments and companies that are susceptible to fluctuations in certain commodity markets. Any negative changes in commodity markets (that may be due to changes in supply and demand for commodities, market S‐4 events, regulatory developments or other factors) could have an adverse impact on those companies.

The Strategic Asset Allocation & Solutions Group is a division of New York Life Investment Management LLC. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for Strategic Asset Allocation and Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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