“We’re favoring global equities over bonds and cash,” Charles Reinhard, deputy chief investment officer, told a press briefing. He noted that although the recent earnings season showed revenues to have been “soft” as the global economy has slowed, “margins have held up well.”
On the policy front, the committee is encouraged by continued easy money from central bankers around the world, plus new tools in the European Central Bank’s arsenal that it expects will lower the “tailrisk” of the Eurozone debt crisis.
They were so cheered that they added to their position in European stocks last week. This vote of confidence brings the allocation back up to par after the Euro crisis had long relegated it to an underweight. Elsewhere in the developed world, the committee is still overweight U.S. stocks and underweight Japan. They are overweight in the emerging markets, because that’s where most of the world’s growth is happening.
Reinhard said that the outlook for global economic growth was not stellar, but acceptable, as analysts expect the world economy to have grown around 4% by the end of this year. Analysts are forecasting growth of just over 3% next year. Reinhard noted that much of the heavy lifting is being done by developing markets, which are posting growth of 5% this year, and are expected to inch up a bit next year, accounting for 80% of the world’s growth. The developed world, including the US, is on track to post gains of just over 1% this year. The US is expected to do a bit better than that – contributing about 14% to the world’s growth. Meanwhile, Japan has posted soft performance, and Europe is still in recession.
Against this backdrop, valuations around the world “are compelling” he said, with global stocks trading at about 11.6 times next year’s expected earnings. He noted the forward price to earnings ratios are all below historical norms – the S&P 500 at a multiple of 12.2, German and French markets both at 10.2, emerging markets at 10.1 and China at 9.2. Dividend yields for global stocks are also at respectable levels of 2.8%.
“The key is to look for companies with PE expansion without earnings going down, and that means global exposure,” Reinhard said. That leads to one of the committee’s top themes is “global gorillas,” large multi-nationals based in the developed world that get much of their revenue from the faster-growing developing world. Largely consumer brands, the play on the rising middle class in places like China and India includes Nestle, Procter & Gamble, Pepsi, YUM, parent of KFC, Taco Bell and Pizza Hut, as well as Inditex, parent of Zara, the popular women’s clothing retailer.
The other major theme is so-called “dividend aristocrats,” companies which have raised dividend payments for 25 years in a row. By requiring the growth in dividends, not just a high yield, investors broaden their sector exposure from the usual suspects in utilities and financials. Picks include Eccolab Group and Emerson Electric.