Energy, agriculture and transport – global themes to watch
Prospects for economic growth are arguably higher in global markets at the moment than in Australia. For instance, domestic gross domestic product (GDP) is forecast to be just 0.8 per cent by 2020 whereas this figure is predicted to be two per cent for the US in the same year.
Markets may have unwound the so-called Trump trade, which saw US stocks Treasury yields and the US dollar lift upon the election of Donald Trump, but global reflation continues. The recovery remains broad enough to be a driver in the reflation contagion across the world as the year unfolds.
What this means for investors is that now is an opportune time to consider investment opportunities in global markets. Here are three ideas to consider.
Global energy offers opportunity
My first high conviction theme for global markets is global energy, which is outperforming some of the more fashionable sectors such as technology.
The global energy sector went through quite a significant cleansing process in 2014 and 2015 as oil prices came under pressure. You don’t pick fights with downtrends.
But there is a point at which the downtrend is likely to exhaust itself and present an opportunity. This time could be imminent.
There has also been a turnaround in global energy sector earnings, with scope for further improvement. This is another reason why this sector could produce interesting investment opportunities in the near-term.
Agriculture exposure avoids market noise
Markets have been overly focused on the new US presidential administration. But that is far from the only theme playing out.
For instance, agricultural commodities are one area that is largely immune from this noise that could be an interesting idea to consider.
This is because they trade on their own fundamentals. When you look at agricultural commodities, wheat is the most high conviction part of the agricultural market.
Wheat prices are trading towards historical lows. When prices are low relative to cost of production, then you have a cheap valuation signal.
US farmers have cut back on wheat plantation to the lowest levels on record, a response to falling prices.
The last time we had a situation like this was in 2012 when production dropped about five per cent but prices rallied about 19 per cent. In 2010, we had a 5.5 per cent drop in production, and we had prices climbing 47 per cent.
So, we believe this is an opportunity that is independent of macroeconomic trends investors could consider. Futures are one way to gain exposure to this trend.
Global transportation a proxy for global growth
The industrial part of the market has underperformed for several years due to concerns about global growth, a slowdown in China and a drop in global trade. These conditions support the opportunity to find well-priced investments in global transport at the moment.
We had a big drop in global trade in 2014 and 2015, which reflected the fall in commodity prices and the significant rise in the US dollar.
Now, however, the context is different. Global growth is on the rise and it is broad-based. Global trade has rebounded quite strongly, led by Asia. Yet, values of trade-sensitive transportation stocks have not recovered.
However, it’s also important not to invest in a sector that’s just cheap and gets cheaper because of poor fundamentals.
Contrarian investing works when the fundamentals are no longer deteriorating. That’s what we’re seeing in global transportation and shipping in particular, and we have been seeking opportunities for our portfolio in this space.
There are many different factors affecting global markets at the moment, which makes it more important than ever to maintain a watching brief on macroeconomic trends to help determine the best opportunities for investment.
Nader Naeimi is head of dynamic markets at AMP Capital.
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