When helping clients choose investments, advisors should consider whether stocks are benefitting from cyclical or long-term trends.
At times, they may be profiting from both, says Michael Reynal, portfolio manager at RS Investments. RS Investments sub-advises the Renaissance Emerging Markets Fund.
Right now, emerging markets are in that camp, he adds. Due to cyclical trends, they should see an upturn over the next year since the global economy’s starting to grow and since interest rates are expected to normalize.
“The era of cheap currency and cheap interest rates is starting to turn, and that will be matched, we hope, with real GDP growth across the globe,” says Reynal. “This would benefit emerging markets the most [and], in particular, we should see the materials sector do well. [I’m referring to] copper, iron ore, steel, and energy companies.”
At the same time, he notes, emerging markets have also managed to keep posting profits over the long term despite volatile global markets. For example, “copper has stuck around $3.00 per pound for the last few years. That’s intriguing since it’s really one of the most volatile, cyclical commodities. We would have expected copper to trough closer to [production cost].”
Currently, he finds efficient companies produce the metal at a cost of $1.50 to $1.60 per pound and then sell it at double the price. So, “producers are able to generate profits today. And in the scenario of the global recovery, they should do extremely well” throughout this year and 2015.
Oil commodities have also withstood trying market conditions despite supply disruptions. “Demand has been sluggish [and] we’re seeing dramatic global events in Russia and Iraq, and across the Middle East,” says Reynal. “And yet, according to the supply and demand balance, oil has found a level which is somewhere around the $100 price point.”
In the technology space, he adds, the smartphone industry also has room for growth. This will occur most in the developing world, where Internet access is needed. “In the developed world, saturation levels have been achieved. But in the developing world, the addition of Internet access to the smartphone” will help boost sales of devices, as well as people’s productivity.