Tyler Mordy, President and CIO of Forstrong Global Asset Management
FOCUS: Exchange traded funds
Calling the end of the 1960s: the return of the high-pressure economy
Global growth has picked up speed as economies gradually unblock. The key question, however, is what governments will do to change the rules of the game after economies return to full reopening. What is now quite clear is that the world’s continued thirst for government largesse will be the lasting legacy of the pandemic. The shame of the deficit and austerity are dead.
Now governments have a historic opening. Will they seize a game-changing economic agenda? Without question. The US government has now spent US $ 5,000 billion on supportive measures over the past year. Unresponsive to any risk of inflation or overheating, the Biden administration is pushing for additional stimulus measures aimed at public investment.
It’s easy to see what’s going on: what’s new is old here. The term “high pressure economy” has quickly returned to today’s lexicon. Originally popularized in the late 1960s by Arthur Okun, economic adviser to the Lyndon Johnson administration, the concept is simple: aim to push GDP growth above its potential and unemployment below the natural rate. . What should follow is that companies increase wages to attract and retain workers. To offset rising labor costs, companies should focus on increasing productivity. All of this should reduce income gaps, improve the workforce and increase innovation.
That’s the theory anyway. In the long run, it doesn’t matter if it works (isn’t economic theory fun?). What matters is that deficits and growth will be higher in the medium term. The period of “new normal” observed after 2008 is over.
Looking ahead, that means a generally weak US dollar, chronic headwinds for growth stocks, and strong returns in emerging markets – the exact opposite market dynamics of the past decade. All of these reflationary tendencies are still spring loaded to last for several years.
KraneShares Bosera MSCI China A Share ETF (KBA NYSE) May 11, 2020 @ US $ 31.56
Chinese onshore “A share” stocks had to contend with an increasingly difficult monetary and fiscal environment, which hampered growth and shook investor confidence. The tide could start to turn, however, as regulators recently announced a decline in banks’ reserve requirement ratio; efficiently release loanable funds. Given the political sensitivity of the Chinese stock market, early indications of a pivot towards a loosening may have a disproportionate impact on performance. Longer term, KBA offers a diversified approach to the continental market (not focused on technology) and tracks an index designed to include specific companies that will gradually see their allocations increase in the flagship MSCI Emerging Markets Index.
IShares MSCI Brazil ETF (EWZ NYSE) Most recent purchase: June 28, 2021 at US $ 40.71
Brazilian stocks are currently benefiting from a number of favorable winds. The recent surge in commodity prices is giving Brazil a terms of trade boost that has yet to be fully reflected in earnings forecasts. The Brazilian real is oversold and undervalued; and with an ongoing cycle of rising interest rates to dampen inflation, the currency has a favorable risk / reward profile. Finally, a credit cycle has strengthened, with non-performing loans being brought under control and loans to the private sector recovering over several years.
VanEck Vectors Chinese Bond ETF (CBON NYSE) Most recent purchase: June 28, 2021 at US $ 24.25
Chinese aggregate bonds are one of the few investment grade bond exposures in the world that still offer a positive real return. As the world’s second-largest bond market, Chinese bonds are grossly under-owned and under-represented in global bond indices; a situation that cannot go on indefinitely. The asset class offers interesting diversification advantages; both classically and politically, with Chinese policy frequently deviating from that of other major economies.
PAST CHOICES: November 3, 2020
IShares South Korea ETF (EWY NYSE)
- Then: $ 67.45
- Now: $ 91.75
- Efficiency: 36%
- Total efficiency: 37%
SPDR Industrial Select Sector Fund (XLI NASD)
- Then: $ 80.22
- Now: $ 102.57
- Efficiency: 28%
- Total yield: 29%
ETF KraneShares Bosera MSCI China A (KBA NASD)
- Then: $ 41.59
- Now: $ 47.71
- Return: 15%
- Total yield: 15%
Average total return: 27%
Company Twitter ID: @ForstrongGlobal
Personal Twitter ID: @tylermordy
Company Website: www.forstrong.com