Global expansion remains on track, which is good news for equities.
For example, in the first half of 2017, industrial output grew at its fasted pace in six years, say National Bank economists Stéphane Marion and Matthieu Arseneau, in a monthly equities report.
Further, world trade and employment are close to record-setting levels. As a result, investor confidence has boosted the MSCI All Country index to an all-time high.
On a total-return basis, the index is up 14.2% year-to-date, with positive contributions from all major world regions, says the report.
“Crucially, this global benchmark continues to be lifted by earnings growth rather than by P/E expansion,” say Marion and Arseneau. “At 16 times forward earnings, the 12-month-forward P/E for the MSCI AC is in fact near its historical average.”
U.S. and Canadian markets
Close to home, the authors have plenty of proof for preferring stocks over bonds.
For example, the S&P 500 is 318 days and counting into a rally — its fourth-longest since 1960. Like the MSCI AC, the U.S. benchmark is up 14.2% on a total-return basis, with all sectors but telecoms and energy up on the year.
“We do not foresee a severe or extended pullback,” says the report. That’s because the equity premium risk — the spread between the return from a stock investment and that of a Treasury bond — remains attractive by historical standards.
The TSX is also making a comeback, surging 2.8% in September and showing a 2.3% return year-to-date. The authors expect strong Canadian employment growth to be a “key source of support for household formation and spending.”
The tightening cycle isn’t a major concern.
“Though monetary policy is set to normalize further in many countries in 2018, we do not expect it to become restrictive any time soon,” says the report. And the authors expect that U.S. rebuilding post-hurricane and proposed corporate tax cuts will help keep the global economy strong.
The economists’ sector allocation is unchanged. The bank remains overweight financials, which are set to benefit from higher interest rates.
In contrast, “We remain market-weighted in energy and underweight in telecoms, utilities and consumer staples, as these sectors are especially vulnerable to rising interest rates,” say the authors.
In a BlackRock global investment report, global chief investment strategist Richard Turnill says, “Structurally lower yields underpin our positive view on equities and other risk assets, and we favour equities overall to credit.”
He expects greater yield increases in the U.S. than in the eurozone, where looser monetary policy is still needed.
“Relatively attractive valuations, ongoing easy monetary conditions and weaker currencies versus the greenback should support stocks in the eurozone and Japan,” he says.
He also likes emerging markets because of economic reform, improving cash flows and reasonable valuations.
“We do not see a modestly stronger U.S. dollar undermining the investment case for EM, but acknowledge the risk of a China growth slowdown if Beijing were to step up its reform agenda.”