Daily Brief: The Global Economy Is Recovering From Last Year, And Investors Are Switching Things Up

Daily Brief: The Global Economy Is Recovering From Last Year, And Investors Are Switching Things Up

almost 3 years ago3 mins

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The global economy has been left bruised and battered by the last year, but it looks like it’s finally starting to recover in earnest.

What does this mean?

Now that the world’s in recovery from the pandemic, the economy’s expected to hit 5.6% growth this year. That’s good news for companies, even if it won’t benefit them all equally: fast-growing firms like those in tech should continue to steadily grow their earnings, but “cyclical” companies should get a much bigger boost from the uptick in economic growth.

Stronger growth

Investors trying to capitalize on that trend have been buying cyclical “value” stocks, whose share prices should rise in line with companies’ earnings growth. And to make room for them in their portfolios, investors have been selling off growth stocks – so much so that the tech-heavy Nasdaq collapsed into a correction last month.

A split market

Why should I care?

Zooming in: Investors are ultimately looking for growth.

Analysts at UBS reckon stock market investors are always chasing the same thing: companies with high earnings growth. And while that might work in cyclical and value stocks’ favor in the near term, investors will eventually return to stocks that can promise growth year in, year out. That’s what seems to have happened in the past, after all: growth stocks have outperformed value for most of the last 50 years.

For markets: Here’s how the rotation is playing out...

Recent data showing the movement of investors’ money into and out of certain funds shows how much of a rotation there’s been in the last month. Stock market investors have opted for emerging markets over developed ones, and industrial and financial stocks over healthcare, utilities, and real estate. Bond investors, meanwhile, have opted for inflation-protected bonds, while selling out of previously popular but risky “junk” bonds.

Keep reading for our next story...

Emerging Markets Are Looking Quite Attractive

EM image

Emerging market (EM) stocks have been looking pretty tasty this year, and it’s all down to three very special ingredients…

What does this mean?

Firstly, EM stocks are highly cyclical, ebbing and flowing in line with global economic growth – and since that growth is on the up, EM stocks are too. Secondly, the weakened US dollar – until recently – should make it cheaper for EMs to borrow money in the currency, as well as boost demand for some of their dollar-denominated exports. And thirdly, plenty of EM economies rely on selling raw materials, which should benefit from climbing commodity prices. Throw in the high valuations of US stocks at the moment, and it’s no wonder investors have turned to EMs in their droves. In fact, the amount of investment managers’ portfolios invested in EM stocks is at its highest ever level.

Asset allocation to EM at record high

Why should I care?

For markets: India could be the best of the bunch.

Still, Morgan Stanley has warned that EM stocks might’ve already hit their peak for the year. So it reckons you need to be a bit more picky about precisely which EM investments you make. Enter India: the bank reckons the country’s strong economic growth outlook should boost Indian companies’ earnings and, in turn, their stocks.

The bigger picture: EMs aren’t immune to higher rates.

Investors’ main worry this year is that central banks will hike interest rates sooner than expected and damage the value of stocks. EMs would feel the effects too, but not necessarily all of them: Goldman Sachs reckons Asian stocks are still a good bet. History, after all, suggests they haven’t moved much lower even when investors have got antsier about rates. The bank’s particularly keen on Asia’s energy and insurance stocks, but recommends avoiding those in the internet and media industries.



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