Tyler Mordy, president and CIO at Forstrong Global Asset Management

FOCUS: Exchange-traded funds

MARKET OUTLOOK:

Calling The Late 1960s: The Return Of High Pressure Economics

Global growth has come roaring back as economies are progressively unlocked. However, the key question is what governments will do to alter the rules of the game after economies return to full reopening. What is now abundantly clear is that the world’s ongoing thirst for government largesse will be the pandemic’s lasting legacy. Deficit shaming and austerity are dead.

Now, governments have a historic opening. Will they seize on a game-changing economic agenda? Without question. The U.S. government has now spent US$5 trillion on support measures over the last year. Unfazed by any inflationary or overheating risk, the Biden administration is pushing for additional stimulus directed at public investment.

It is easy to see what is happening: what is new is old here. The term “high pressure economics” has moved swiftly back into today’s lexicon. Originally popularized in the late 1960s by Arthur Okun, an 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 raise wages to attract and retain workers. To offset increased labour costs, firms would need to focus on boosting productivity. All of this should shrink income gaps, upgrade the labour force and increase innovation.

That’s the theory anyway. Over the long term, it really doesn’t matter if it works (isn’t economic theory fun?). What matters is that deficits and growth will be higher over the medium term. The “new normal” period witnessed after 2008 is over.

Looking ahead, that means a generally weak U.S. dollar, chronic headwinds for growth stocks and strong returns in emerging markets — the exact opposite market dynamics of the last decade. All of these reflationary trends are still spring-loaded to last for several years.

TOP PICKS:

KraneShares Bosera MSCI China A Share ETF (KBA NYSE) May 11, 2020 @ US$31.56

Onshore Chinese “A share” equities have had to contend with a tightening monetary and fiscal environment, which has cooled growth and dampened investor sentiment. The tide may be beginning to turn however, as regulators recently announced a decrease in the reserve requirement ratio for banks; effectively releasing loanable funds. Given the policy sensitivity of the Chinese stock market, early indications of a pivot towards loosening can have an outsized impact on performance. Longer-term, KBA offers a diversified approach to the mainland market (not concentrated in tech), and tracks an index designed to include the specific companies which will gradually see their allocations increase in the bellwether MSCI Emerging Markets Index.

iShares MSCI Brazil ETF (EWZ NYSE) Most recent purchase: June 28, 2021 @ US$40.71 

Brazilian equities have numerous tailwinds at present. The recent boom in commodity prices provides a terms of trade boost to Brazil that has not yet been fully reflected in earnings expectations. The Brazilian real is oversold and undervalued; and with an interest rate hiking cycle underway to dampen inflation, the currency has a favourable risk/reward profile. Lastly, a credit cycle has gained traction as non-performing loans have been reined in and loans to the private sector are in a multi-year upturn.

VanEck Vectors China Bond ETF (CBON NYSE) Most recent purchase: June 28, 2021 @ US$24.25 

Chinese aggregate bonds are one of the rare investment grade fixed income exposures worldwide that still offer positive real yield. As the world’s second largest bond market, Chinese bonds are significantly under-owned and under-represented in global bond indices; a situation that cannot be sustained indefinitely. The asset class offers attractive diversification benefits; both in the classical sense as well as from a policy standpoint, as Chinese policy frequently diverges from that of other major economies.

PAST PICKS: November 3, 2020

iShares South Korea ETF (EWY NYSE)

• Then: $67.45
• Now: $91.75
• Return: 36%
• Total Return: 37%

Industrial Select Sector SPDR Fund (XLI NASD)

• Then: $80.22
• Now: $102.57
• Return: 28%
• Total Return: 29%

KraneShares Bosera MSCI China A ETF (KBA NASD)

• Then: $41.59
• Now: $47.71
• Return: 15%
• Total Return: 15%

Total Return Average: 27%

Company Twitter Handle: @ForstrongGlobal

Personal Twitter Handle: @tylermordy

Company Website: www.forstrong.com

Blog: https://www.forstrong.com/global-thinking/