Stock investors should look a yonder
by James Paulsen, Chief Investment Strategist, Wells Capital Management
We think the global economic recovery may be in the early stages of a synchronized bounce. While we suspect the overall pace of economic growth will likely remain subpar by historic standards, the global recovery appears poised to broaden. That is, for one of the rare times in this recovery, perhaps most economies about the globe will bounce northward together.
Recently, somewhat better economic reports have already helped elevate stock prices about the globe including pushing the U.S. stock market to new record highs. However, if evidence of a global economic bounce broadens, it is likely to help international stocks much more compared to domestic stocks. For several reasons, we think investors should consider a near maximal overweight toward both ex-U.S. developed and emerging stock markets. International stock markets have underperformed for some time and consequently most are now significantly under-owned and represent better values relative to U.S. stocks. Additionally, only the more mature U.S. economic recovery now faces the challenges associated with returning close to full employment. Consequently, most international stock markets will continue to be supported by hospitable policy actions whereas U.S. officials are beginning to turn hostile for the stock market. Moreover, the U.S. dollar has peaked in the last year and appears likely to weaken in the coming year. Finally, and perhaps most importantly, compared to an aging earnings cycle in the U.S., most international companies still have the potential to achieve considerable earnings gains.
A global economic bounce?
After seven years of chronically disappointing economic growth about the globe, in the immediate aftermath of the current crisis de jour Brexit and in a world which now boasts negative sovereign bond yields as commonplace, few anticipate that the world economy may be on the brink of an economic bounce.
However, for the first time in this recovery, all policy officials are simultaneously pushing upward on the global economy. Although the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been in conflict. Today, though, Japanese policy officials are no longer hesitant but rather are implementing full out Bernanke stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, has now also fully embraced central bank balance sheet expansion. Moreover, the oil crisis has forced energy based economies like Canada and Australia to also become accommodative. Finally, China (similar to other emerging economies) is no longer attempting to moderate its recovery as it was until 2015 but rather is using all weapons (a collapse in its sovereign bond yield, a surge in the growth of its money supply and a more aggressive yuan devaluation) to quicken growth. Economic policies around the world are finally attuned suggesting the odds of a synchronized global economic bounce may be higher than ever before in this recovery.
Indeed, a global economic upturn may already be underway? As illustrated in Chart 1, the Westpac Positive Surprise Global Index has surged by its quickest and largest amount of the entire recovery since March and now stands at its best level in more than five years. An improvement in economic momentum is also strongly suggested by rising stock markets. Developed world stock markets are up by about 15% to 20% and emerging stock markets have risen by almost 30% from early-year lows. Finally, commodity prices also imply rebounding economic momentum with U.S. industrial commodity prices up by about 20% from first quarter lows.
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