As we head into a new week filled with uncertainty after the horrific terrorist attacks in Paris, one thing is clear: While U.S. growth remains relatively resilient, global growth continues to slip. Last week the OECD cut its estimate of global growth for the second time in three months. The organization now expects the global economy to grow 2.9 percent this year and 3.3 percent in 2016, down from previous estimates of 3.6 percent for both years.
Part of the problem is that emerging markets, an engine of growth for much of the past decade, continue to decelerate. Last week provided more evidence of the slowdown in China. Exports are now down 3.6 percent from a year earlier while both inflation and industrial production are decelerating, according to Bloomberg data. Elsewhere, Friday’s multiple terrorist attacks in Paris reinforce the significant threat that global terrorism represents throughout the world. From an economic perspective, the fallout from these attacks will likely put some pressure on the French economy as well as the euro.
In the meantime, the sluggish global environment is impacting markets and has several implications for portfolios, as I write in my new weekly commentary, “Yield: One Commodity That’s Still Hot.”
Along with a strong dollar, tepid growth is pushing down analysts’ estimates for 2016 earnings. Estimates for S&P 500 2016 earnings have fallen by 2 percentage points over the past five weeks, Bloomberg data show. Should the dollar continue to rise and/or global growth remain sluggish, they may have further to fall.
In addition, slow global growth implies more monetary easing by most of the world’s central banks. Even before the Federal Reserve (Fed) raises rates, easing by central banks in Europe, Japan and China may put further upward pressure on the dollar, resulting in a de facto monetary tightening. In turn, a strong dollar is helping to keep a lid on inflation.
As for what this means for investors, three implications are top of mind.
The Impact of Slower Global Growth
Pressure on Cyclical Commodities
Sluggish global growth and muted inflation continue to put pressure on commodity prices, particularly those most exposed to global growth, like prices for industrial metals and oil.
Contained Long-Term Rates
In an environment in which inflation is modest and yields remain low, investors are likely to continue to stretch for yield. Case in point: Last week utility stocks, as measured by the Dow Jones U.S. Utilities Index, managed to buck the broader selling and post a small gain, according to numbers via Bloomberg. Though the sector remains expensive, in a low yield world, investors are more willing to pay a premium for companies with relatively safe dividends.
Continued Desire for Yield in Portfolios
While I wouldn’t chase classic yield plays like utilities or consumer staples, other parts of the yield space look more interesting. For example, preferred stock, as measured by the S&P U.S. Preferred Stock Index, appears reasonably valued, and offers an opportunity to seek yield. To the extent that growth remains sluggish, I believe that yield is likely to remain a valuable commodity.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.
