The Exchange

Inklings of a Global Growth Handoff Entice Investors

The Exchange

For months, investors' gaze has been trained on Washington and the political fight for the fiscal future.  But the U.S. stock market's prospects for building on its 5% rebound since Nov. 15 will likely have more to do with what's going on in Seoul, Shanghai and Frankfurt.

Stocks have been able to hang on to most of their gains from the early part of the year through the election campaign, and so far during budget trench war, mostly because the domestic economy has held up pretty well -- especially compared to recessionary Europe and emerging countries struggling to restart their rapid growth pace.

The housing market lifting off a depressed base, car sales chugging ahead at a healthy clip and consumer confidence finally perking up have made the U.S. an oasis of (albeit slow) growth and American capital markets a comparatively safe destination for global cash.

Domestic-oriented stocks such as retailers and health-care providers have been standouts, and a popular hedge-fund trade has been to own the S&P 500 index (^GSPC) while betting against emerging-market vehicles such as the iShares MSCI Emerging Markets fund (EEM).

There are now signs, though, that a handoff, even if it's a sloppy one, could be underway, as U.S. momentum has eased and markers of growth in the rest of the world show tentative signs of revival. This could lead to a run of outperformance by global cyclical plays, such as the EEM and big American industrial and commodity stocks, which have borne the brunt of the 2012 version of what seems to be an annual economic growth scare.

While the domestic Institute for Supply Management manufacturing index for November today fell to 49.5, short of forecasts of 51 and the weakest reading of the year, China's counterpart purchasing managers index over the weekend logged a seven-month high, modestly into the range denoting an expanding factory sector. South Korean imports, a bellwether indicator of electronics demand from the economy at the whip-end of global trade in finished goods, jumped 3.9% last month.

Meantime, Goldman Sachs last week projected that 2013 GDP growth in the BRICs developing countries — Brazil, Russia, India, China — will accelerate to 7.2%, more than twice the overall world growth rate. The firm is recommending that investors tilt portfolios toward multinational companies with outsized exposure to BRICs economies.

Jim O'Neill, the chairman of Goldman Sachs Asset Management and the coiner of the BRICs rubric several years ago, remarked separately in a CNBC interview today that he is finally seeing some institutional investors reallocating funds toward European stocks.

The Continent's debt markets have been stable, with the Bloomberg European Financial Conditions Index at its strongest levels of the year, and the stocks of its big export companies appear cheap relative to their American peers. The euro zone PMI today was lower for the eighth consecutive month, but the speed of decline eased.

These all shape up at least to a nascent theme of gathering cyclical strength outside the U.S. at a moment when the domestic economy is flattening out a bit.  Of course, neither of these trends are sure bets to persist, or proceed in a straight line.

The American economy, for one, hasn't so much stalled broadly as shown signs of business-investment fatigue. Capital spending has ebbed to low levels compared with corporate profits, and today's ISM number showed a steep decline in inventories (after third-quarter GDP data told of an inventory surge). These are plausibly read as responses to the unknown fiscal rag of impending government spending cuts and higher taxes that could be triggered Jan. 1, but by the same token would then represent sources of eventual pent-up demand.

The most nettlesome bit of the emerging-market reacceleration thesis is probably the continued lethargy in the mainland Chinese stock market, which can usually be counted on to herald an approaching economic quickening phase with a sprightly rally.

The Shanghai Stock Exchange Composite Index -- which tracks the performance of the local Chinese equity market rather than the financial flows that move around the stronger-performing Hang Seng Index (^HSI) in Hong Kong --  is trading near its 2012 lows right now. Whether reflecting still-soft commodity prices, the strengthening Chinese currency which cools imports or a sign that China's central bank hasn't done enough to energize financial activity there, this index is failing to flash an all-clear signal for the global-growth trade just yet.

The U.S. market is laboring to look beyond the fiscal-cliff hoopla. After a weekend of nonstop but progress-free fiscal-cliff talk and a morning disappointment on the domestic manufacturing front, the S&P 500 is near flat today -- suggesting that investors are mindful of clues of firmer economic footing outside the U.S. Whether these clues develop into a clear trend will do more to determine the lasting direction of the tape than the fiscal deadline drama in D.C.

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