by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

Call #1: Some risks to the global econ­omy appear to be fading.

Global equi­ties ral­lied last week, push­ing stocks back toward their Octo­ber highs, as investors reacted to two new developments:

1. Signs of progress in Europe. Investors are focus­ing on some pre­lim­i­nary evi­dence that pol­icy mak­ers are get­ting more aggres­sive about com­bat­ing the cri­sis in Europe. This has taken sev­eral forms includ­ing a coör­di­nated global effort by many of the world’s cen­tral banks to ease the strain on bank fund­ing, which is a big prob­lem for Euro­pean banks. Investors also have ris­ing expec­ta­tions that Euro­pean politi­cians are inch­ing closer to a plan for fis­cal inte­gra­tion, and that the Euro­pean Cen­tral Bank is soft­en­ing its oppo­si­tion to using its bal­ance sheet to help fight the crisis.

2. Better-than-expected US eco­nomic data. The sec­ond fac­tor sup­port­ing mar­kets is more evi­dence that — absent a wors­en­ing Euro­pean cri­sis — the broader global econ­omy can avoid another con­trac­tion even while Europe is likely to expe­ri­ence a reces­sion (if it isn’t in one already). Most eco­nomic data, par­tic­u­larly in the United States, con­tin­ues to come in at, or bet­ter than, expec­ta­tions. One data point I want to high­light is last Thursday’s Novem­ber ISM man­u­fac­tur­ing report. The head­line num­ber came in bet­ter than expected and con­tin­ues to improve from its sum­mer lows. More impor­tantly, the new orders com­po­nent shot up in Novem­ber to its high­est level since April. As I’ve men­tioned in the past, new orders tend to lead gross domes­tic prod­uct growth. Thursday’s new orders com­po­nent con­firmed my view that fourth-quarter US GDP growth should be healthy, per­haps close to 3%.

While we’re not out of the woods yet — Euro­pean politi­cians will need to deliver a clear and cred­i­ble plan at their sum­mit later this week — at least some of the non-European risks to the global mar­ket, such as a weak­en­ing econ­omy in the United States, appear to be fading.

Call #2: Remain over­weight on global energy companies

I’ve been advo­cat­ing an over­weight to energy all year, and I still view the sec­tor as a good oppor­tu­nity for three reasons.

1. Global energy stocks look par­tic­u­larly inex­pen­sive. Energy stocks are up roughly 5% year to date, per­form­ing well ahead of global equi­ties. Despite the out­per­for­mance, the sec­tor remains cheap. It cur­rently trades at roughly 11x trail­ing earn­ings, a 15% dis­count to the broader market.
2. Poten­tial for attrac­tive yield. Global energy stocks cur­rently offer a yield of around 2.25%.
3. Poten­tial for ele­vated oil prices. I expect that despite the slow recov­ery, oil will remain ele­vated due to strong demand out of emerg­ing mar­kets, sup­ply con­straints and geopo­lit­i­cal risks.

A poten­tial vehi­cle for access­ing energy is the iShares S&P Global Energy Sec­tor Index Fund (IXC).

Source: Bloomberg

Dis­clo­sure: Author is long IXC

Past per­for­mance is not indica­tive of future results.

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Nar­rowly focused invest­ments typ­i­cally exhibit higher volatility.

Read more from the author/contributor here.

Comments

Comments are closed.