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Are You Ready to Ride the Global Wave?

April 25, 2012

The economy seems like it’s been in choppy waters lately. A rise in manufacturing is negated by a weak jobs number. The U.S. housing market’s signs of life are impeded by high gas prices. The eurozone appears to be improving, then a sovereign debt rogue wave surfaces in Spain.

How can investors make sense of these mixed signals? Analysts at Bank of America-Merrill Lynch created the Global Wave, a compilation of seven global indicators designed to provide a comprehensive assessment of trends in global economic activity. The compiled data allows investors to predict equity market performance and equity rotation.

The Global Wave’s Seven Components
Global Component  Measures
Source: Bank of America-Merrill Lynch
Industrial Confidence   Global economic output
Consumer Confidence Demand/consumption side of the economy
Capacity Utilization  Investment/productivity side of the economy
Unemployment  Global labor market
Producer Prices Producer prices in the manufacturing sector
Credit Spreads Credit spreads using the Merrill Lynch Global High Yield Index as a proxy (the U.S. High Yield Master II Index was used prior to 1998)
Global Earnings Revision Ratio Number of stocks with earnings upgrades versus the number with downgrades based on BofA-ML’s three-month consensus

Last week, the Global Wave was signaling a trough in the global cycle, which prompted BofA-ML to suggest “investors position for an economic upturn” by increasing their exposure to equities. According to BofA-ML’s research, the MSCI ACWI (All Country World Index) averages a 14.2 percent increase for the 12 months following a trough in the Global Wave. Historically, the index has experienced a positive return 86 percent of the time.

The Global Wave

What turned the tide? BofA-ML says global central bankers’ easing measures “appear to be having a positive impact” and macroeconomic data is improving. Collectively, global central bankers have implemented 138 stimulative policy initiatives in just the past eight months, according to ISI Group. The latest of these include the International Monetary Fund (IMF) doubling its eurocrisis fund to $430 billion, China easing monetary policy, and interest rate cuts in both Brazil and India.

Currently, five components (industrial confidence, earnings revision ratio, credit spreads, consumer confidence and capacity utilization) are trending positive while unemployment and producer prices are contributing negatively. BofA-ML says the global earnings revision ratio is currently the “largest contributor to the Global Wave.”

Earnings season is off to a great start in the U.S. Of the 106 companies in the S&P 500 Index that have reported results so far, 83 percent have beaten analyst estimates, according to a FactSet blog entry I found through Business Insider. If the current pace holds up, it would represent the highest beat-rate in three years.

Add this positive news about U.S. stocks to the data from BofA-ML above, which indicates emerging markets and the Asia Pacific ex-Japan region have historically been the best-performing regions following a trough for the Global Wave, and you have a real opportunity. In terms of which sectors have historically been the best performers, the data shows technology, diversified financials, basic materials, autos and energy have outperformed.

That’s good news for oil and gold stock investors. The Global Wave may be just what is needed to wash away the performance gap I highlighted in my previous post.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets. The BofA Merrill Lynch Global High Yield Index tracks the performance of high yielding investment grade bonds of corporate issuers in countries around the world. The BofA Merrill Lynch U.S. High Yield Master II Index tracks the performance of U.S. dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. To qualify for inclusion in the index, securities must have a below investment grade rating (based on an average of Moody's, S&P, and Fitch) and an investment grade rated country of risk (based on an average of Moody's, S&P, and Fitch foreign currency long term sovereign debt ratings).

Net Asset Value
as of 08/29/2014

Global Resources Fund PSPFX $10.06 0.09 Gold and Precious Metals Fund USERX $7.57 0.06 World Precious Minerals Fund UNWPX $6.99 0.04 China Region Fund USCOX $8.29 -0.01 Emerging Europe Fund EUROX $7.99 -0.01 All American Equity Fund GBTFX $34.04 0.16 Holmes Macro Trends Fund MEGAX $24.69 0.15 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change