;Chief investment strategist at Advisors Asset Management.
Recently, a phrase in the book “A River Runs Through It,” by Norman Mclean, caught me as a perfect sentiment for opportunities we see in the market. “At sunrise everything is luminous but not clear.”
Opportunities are always fraught with pessimism and benign expectations.
The three pillars of economic growth have been heavily reliant on the U.S., while the European and China legs have been wobbly at best. I am reminded of the three components of a successful baseball team: pitching, catching and hitting. In this scenario, the United States has had admirable pitching, while the defense (Europe) has been shaky and the hitting (China) seemingly has an 0-2 count against them. However, as much as the “Bernanke Put” is in place here in the United States, the “Beijing Put” is now in place with a floor of 7% GDP being set by the government.
Now we have been bullish on select markets in Europe and China in general. While China’s equity returns have been less than stellar, the three main indexes in Europe have done well, in spite of lackluster economic growth. The FTSE 100 is up 11.01% UK:UKX -0.18% , the CAC 40 FR:PX1 -0.25% is up 11.21% and the DAX DX:DAX +0.25% is up 8.71% year to date. Two components in Europe look to continue the positive returns going forward.
First, the sentiment indicators in Germany and the euro zone both are trending upward.
This is significant, in that the sentiment backdrop has been eroding for some time. With the second component of the broad European elections coming to an end, it appears that political stabilization is allowing business sentiment to increase. We continue to favor the select indexes above and believe the conditions in Europe will help boost global growth if at least marginally better.
China is the story that offers the most intriguing value on the global front.
The transition over the last seven months from the old to the newer government has had a tremendous impact on the long-term prospects. By shocking the “SHIBOR” (short-term funding rates similar to LIBOR), we saw the “pound of cure” applied where the “ounce of medicine” was neglected over the last couple of years. This helped to mitigate the impact and potential risk of the shadow banking looming crisis.
Though the application of shocking SHIBOR has short-term side effects to growth, it also allows the central government to control an unregulated lending component that, left unchecked, could cause a much bigger challenge years down the road. To further complement this action, we have also seen the Central Party, through several moves, transition more control to federal component of government versus the local authorities.
Leaders have realized that during times of duress, being overly reliant on the U.S. consumer can leave you very vulnerable to sentimental swings in consumption. Though this transition will take longer for Europe, due to cultural and demographic metrics, China is at an inflection point where a subtle transition now will have a positive rippled impact years down the road. We are already seeing this focus taking place because of the challenges to the industrial output’s recent challenges.
With growth poised to outperform over the next year due to tepid expectations, our call to invest in the basic materials and energy sectors should have a substantial positive impact.
We understand the hangover of negative headlines and stagnant policy with regard to Europe and China has led to underweight balances in these two important economic components. However, the timing seems appropriate to become a complementary aspect of the global growth and a contrarian moment has seemed to present itself.