Global growth story still intact – World GDP growth is expected to accelerate again this year to its best level since 2010.1 The rate of improvement has stalled a bit to start this year, possibly the result of recent gains and global political uncertainties. Nevertheless, employment conditions, manufacturing activity, credit conditions and monetary policy settings across advanced economies remain quite healthy, pointing to sustained expansion.
Trade war is a threat – Protectionist trade strategies and concerns that retaliatory measures could spill into a trade war are a prevalent risk to the global expansion, but we don’t think this will result in the world’s major economies closing their doors to trade. For perspective, the recent tariffs announced on U.S. imports from China represent less than 0.5% of global trade.2 It’s likely the protectionist rhetoric from the U.S. and other trading partners will continue as part of what we perceive as the larger negotiating process, stoking periods of volatility along the way.
International equities remain attractive – Despite strong outperformance last year, we don’t think the relative strength of international equity performance has run its course. The U.S. economy is gaining traction, which combined with the benefits of corporate tax reform, sets the stage for strong S&P 500 earnings growth ahead. Similarly, we think overseas markets are earlier in the cycle. This, combined with lower valuations, supports our positive outlook for international equities.
Equity investments carry risk, including the loss of principal. There are special risks inherent in international investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks. The prices of small cap and mid cap stocks are generally more volatile than large company stocks.
1. International Monetary Fund.
2. Capital Economics.