This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asser Management.
Global economic stabilization continues to be our primary theme with respect to our investment ideas.
We think that the U.S. Federal Reserve (the Fed) will remain on hold, so the risk of an economic decline should be contained and the current business cycle can continue on. At these current market valuation levels, we do not expect much more upside from U.S. equities and traditional bonds in this environment. However, we are finding interesting investment opportunities in securities we consider nontraditional, as well as foreign markets.
Nominal GDP growth has slowed since the Fed began tightening monetary policy in January 2014 by “tapering” its bond purchases and finally having raised interest rates in December 2015.
We think the Fed will remain on hold for now, which should allow economic growth to stabilize near its current level going forward. As a result, we expect the gap between revenue growth and NGDP to close as revenue growth accelerates. As this unfolds, we think general price trends will be upward as a result of slow economic growth, supporting revenue and earnings growth, though we do expect continued market volatility.
Where To Look Now
Income has been a hot topic of late, and investors looking for this exposure would be well-served by considering funds that offer a mix of fixed income and equity holdings to generate a relatively consistent yield, along with providing low correlation and lower volatility than the global equity markets.
Examples of these products include the iShares Morningstar Multi-Asset Income ETF (IYLD) and the First Trust Strategic Income ETF (FDIV). These offerings invest in income-producing areas, such as mortgage REITs, MLPs, preferred securities, high-yield, emerging market bonds and dividend-paying equities.
We often consider these types of products as alternative investments due to their correlation benefits and lower volatility than the global equity market.
We are finding a more attractive mix of yield and valuation in foreign equities. In our opinion, the U.S. equity market has rallied to be fairly valued. While the U.S. equity market has risen to its historical average price-to-book value, developed European and Japanese equities are still priced at a discount to their historical averages.
There are several options for investors looking for broad exposure to foreign equities, such as the iShares MSCI ACWI ex-US ETF (ACWX), the SPDR S&P World ex-US ETF (GWL) and the WisdomTree International Equity Fund (DWM).
Emerging Market Out-Brightens
Our confidence in the stabilization of major emerging market economies has increased recently as well.
The most recent composite measure of the Purchasing Managers Index shows continued recovery in these economies after slipping late last year. As a result, investors may want to consider adding exposure to emerging market bonds. The iShares JP Morgan USD Emerging Markets Bond ETF (EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) are good options in this area of the market.
We prefer to gain exposure to this area using dollar-denominated bonds rather than local currency. With foreign bonds, a currency move in the wrong direction can easily wipe out return potential for years to come; therefore, we like to reduce currency risk by using bonds that are denominated in U.S. dollars.
At the time of writing, Stringer Asset Management held IYLD, DWM and EMB among its universe of ETFs included in its suite of ETF portfolios. Stringer Asset Management is a Memphis, Tennessee-based third-party investment manager and ETF strategist. Contact Stringer at 901-800-2956 or at firstname.lastname@example.org. For a complete list of relevant disclosures, please click here.
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