(Bloomberg) -- Many things are going well for the global economy right now—all at the same time. The past decade featured the global financial crisis, severe weakness in the euro area, a commodity meltdown, and concerns about China. Now, although a chill has settled over Russia's relations with the West, there don't seem to be too many worries on the horizon for markets.
The U.S. appears headed for growth this year in the mid-2 percent area, if not 3 percent, as corporate earnings stay robust. Europe's profits are finding their footing, and the European Central Bank is pulling back on ultraloose economic policy. China isn't growing as much as it was some years ago, but fears of a severe downturn for the country haven't taken hold. Even Japan, once the poster child for economic failure, is making progress in its fight against deflation. And emerging markets are along for the ride, too.
Early February brought a quick, sharp downturn in the markets, but the recovery has been notable as well. The MSCI All Country World Index had made back more than half of its losses by the last week of the month, and gauges of volatility such as the Cboe Volatility Index, or VIX, were back almost to levels before the drop.
So economic data, stock prices, and volatility all seem to be behaving—for now. That sounds a lot like global synchronized growth. But what does it mean, and where can investors turn to take advantage of it? Here are some perspectives.
So synchronized growth is definitely happening?
“Synchronized growth is there—it's just a function of how much of an outperformance you've built into your numbers. The continued moderate numbers are going to allow the central banks to take their foot off the pedal. I think it's a function of how aggressive monetary policy needs to be if synchronized growth is going to be a longer-term trend. And I don't really see any of the alarms that people might see if they think a recession is coming.” —Marvin Loh, senior global markets strategist at Bank of New York Mellon Corp.
What does it mean for stocks?
“Normalizing inflation and declining global deflationary risks are positives for equities at this stage of the cycle, and we believe there has been some overreaction to inflation headlines lately. Historically, moderating inflation combined with wage growth led to stronger revenue growth, margin expansion, and asset appreciation. —Dubravko Lakos-Bujas, head of U.S. equity strategy and global quant research At JPMorgan Chase & Co.
Where specifically might be good to invest?
“One area that's just been terrible for the last three and a half years has been anything energy-related, though numbers for oil demand have been super strong. I think they're underowned. Another area that's cheap for what it is are European financial companies. U.S. banks from 2012 onward have been terrific performers, and you could be in for a similar run in Europe, because these things have lagged so significantly. If you're feeling aggressive about global synchronized tightening, look at Japanese banks: They're among the cheapest in the world, and there isn't a lot of bad credit stuff in there.” —Brian Barish, chief investment officer at Cambiar Investors LLC
Energy then?
“Energy has historically been a very consistent late-cycle outperformer. The sector has focused on cost reduction more so than others and has lagged the performance of oil prices. Also, focus on Europe and European stocks. The market is too downbeat about them. People overlook that European earnings were hit hard in the past five years by bank deleveraging, then the emerging-markets slowdown, then the drop in commodities. They're all now turning higher at the same time, and synchronized growth helps all three of those factors.” —Andrew Sheets, chief cross-asset strategist at Morgan Stanley
Aren't rising rates a risk, though?
“Historically, the relationship between bond yield and equity valuation is an inverted U. Rising yields initially support higher multiples as this reflects stronger underlying real economic growth and firming inflation. At an inflection point, rising rates become a headwind for growth and multiples, which eventually turn into policy error. During periods when growth ranged from 2 percent to 3 percent, multiples were supported until around 5 percent. Given global synchronized growth combined with policy support, we believe an equity multiple of about 18x is reasonable as long as yields don't exceed 4 percent. In our view, equity investors should be more concerned about unwinding quantitative easing in the face of rising deficits than moderating inflation and wage growth. The higher government bond supply could potentially crowd out equity flows and more significantly weigh on equity multiples eventually.” —Dubravko Lakos-Bujas
Could it be too much of a good thing?
“Central banks do seem to be working in lockstep. We seem to be in an era of coordinated actions, which has led to the most synchronized global growth in 10 years. It brings to mind the saying that rising tides lift all boats. This is certainly a good thing, and global investors play for incremental gains between regions. The downfall could be if we had synchronized global cycles where all regions suffer downfalls and recessions together. Then we would, in essence, lose our diversification ability.” —Larry Peruzzi, director of international trading at Mischler Financial Group Inc.
How about February's turbulence?
“In some ways, we got lucky that the volatility incident happened during a time of strong growth. But we need to be mindful that more things can come up. Are there events later in the year that could create uncertainty? What would actually be painful for the market, and we haven't had: A lot of active managers and hedge funds are overweight tech—if there's a big rotation away from some of the leadership sectors like tech and industrials, that could be more painful for the market than the early February drop.” —Andrew Sheets
Should we worry?
“If we compare the current environment to that of early 2016, the last time volatility spiked, there is a lot less to worry about in the economy. Back then we had plummeting energy prices, all kinds of concerns about an implosion in China, and European banks feeling wobbly. Now we have synchronized global economic growth, a big corporate tax cut, and fiscal stimulus. While these factors raise some concerns about future inflation, the resulting higher interest rates should be good overall for financial sector earnings. So far, I have to say that the volatility we have seen is “good volatility,” reflecting a needed market correction, which should support increased trading activity.” —Frederick Cannon, head of research and chief equity strategist at Keefe, Bruyette & Woods Inc.
What about the U.S. dollar?
“Familiar FX-rate-volatility correlations are failing as the global economy moves out of the post-financial-crisis phase of absurdly cheap money. The combination of rising U.S. yields, rising equities, and a falling dollar reflects a more synchronized global recovery that is luring money away from the dollar, something we last saw for a sustained period in 2004 to 2007. What started then as optimism about the global recovery after the Asian crisis, of course, ended in hype, hubris, and excess. Hopefully, we'll not get to that stage again.” —Guy Stear, head of emerging markets & credit research at Societe Generale SA
Does the U.S. fiscal stimulus matter at all?
“Many are critical of the fiscal stimulus the U.S. is providing through tax cuts and spending increases while the economy continues to grow above trend. It produces a large deficit and increases the U.S. debt burden, but even those who accept the need for public investment have serious reservations about the magnitude of the fiscal stimulus now. Although the world enjoys a synchronized expansion, the great financial crisis may not be truly over until the downside of this business cycle is managed. Pro-cyclical monetary and fiscal policies exacerbate the challenge that lies ahead for investors and policymakers.” —Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co.
Any silver lining?
“We haven't yet seen the surge in capital expenditures that's to come from the U.S. tax cuts and may not appreciate the amount of upside there is in corporate profits and business activity.” —Dean Curnutt, chief executive officer of Macro Risk Advisors LLC
Ossinger covers cross-asset and market themes at Bloomberg News in New York.
To contact the editor responsible for this story: Jon Asmundsson at jasmundsson@bloomberg.net.
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