U.S. businesses are telegraphing unprecedented optimism about doing business globally which signals reasons to consider a global approach for client portfolios.

 

Todd Crawley: This week we’re talking about tapping into global optimism for client portfolios. I’m Todd Crawley and you’re listening to The Essential Practice podcast. The doctors are in!

Brian Jacobsen: That’s right!

Todd: Dr. Brian Jacobsen, chief portfolio strategist with Wells Fargo Asset Management, joins us. Brian, welcome.

Brian: Thanks for having me back.

Todd: We’re also going to hear from Global Economist, Dr. Jay Bryson, with Wells Fargo Securities. Dr. Bryson joined Brian for a two-part series of On the Trading Desk® discussing the Wells Fargo International Business Indicator Survey, IBI for short, which measures U.S. companies’ sentiment around plans for international business. That survey was conducted in the time between the U.S. presidential election in 2016 and President Trump’s inauguration in January. Wherever you’re listening to this program, we encourage you to go listen to part 1 and part 2 of those programs. But the IBI survey indicated U.S. businesses are more optimistic now than ever before—let’s hear Dr. Bryson explain why, then get your reaction.

Brian: Sure.

Jay Bryson: When businesses are looking out over the next 12 months, 81 percent of those businesses said that their international businesses would increase either A, a little or B, a lot. Okay? And so last year only 65 percent said that. And then when you look at how much more important to their overall business will it be? Again, a number like 80 percent also said it was going to become somewhat more important or a lot more important, and last year that was only 54 percent. So, pretty optimistic readings in terms of international business.

Todd: Brian, what’s driving this optimism, do you think?

Brian: I think the optimism has two primary drivers. The first is the election. People could be relieved that it’s over, but most business surveys show that business owners and executives are looking forward to an easier regulatory environment and perhaps some tax reform. That’s the political driver. But there’s a second economic driver. Global growth began accelerating towards the end of the summer. First quarter earnings season is all but done and it’s showing that businesses that are more internationally oriented have had better earnings growth than more domestically-oriented firms. For S&P 500 companies, those firms that get more than 50% of their revenue from outside the U.S. had year-on-year earnings growth of 13.6%. Firms that have 50% or more of their revenue from inside the U.S. had earnings growth of 9.9%. That’s still good, but not as good as for those benefiting from global growth.

Todd: The IBI results showed 70 percent or more of the respondents said that the international and U.S. outlooks were better. So that’s good. But not without concern, as Dr. Bryson explains.

Jay: There was also broad agreement about negative attitudes towards trade pacts, and this is referencing during the campaign, actually both presidential candidates kind of beat up on international trade. So here about 80 percent said that they either very concerned or somewhat concerned about some of these negative attitudes.

 Todd: Fast-forward to today Brian, what’s the trade picture look like?

Brian: What people say to get elected can be pretty different from what they do when in office.

Emerging markets have done quite well year-to-date, but they really underperformed from the election to the end of the year. I think that’s because a lot of investors were wondering how serious President Trump was about reshaping the landscape of global trade. Yes, President Trump announced the U.S. was withdrawing from the Trans Pacific Partnership, but that was mainly symbolic as Congress hadn’t ratified that agreement. The administration imposed duties on Canadian softwood, but that was as a result of an agreement crafted by the Obama administration expiring. On the positive side, there was a trade deal announced to open up the Chinese market to U.S. natural gas, beef, and credit card services in exchange for opening the U.S. to Chinese cooked poultry. So, things in practice aren’t as bad as on the campaign trail.

Todd: In fact, Dr. Bryson caps off his comments with the following.

Jay: These businesses are getting deeper and deeper into some of these sort of emerging economies. So for all the talk that globalization is dead, businesses aren’t acting that way yet.

Todd: Well Brian, that’s great to hear. So let’s talk about how advisors can help their clients tap into that optimism.

Brian: Shortly after the election, we suggested advisors should look at emerging markets for investment opportunities. A lot of negativity was priced in. Commodity prices have been very volatile, but they’re higher than they were in the depths of the early 2016 market sell-off. That helps the outlook for commodity exporting emerging markets. There’s also a lot of domestic growth in many emerging markets. But some emerging markets may be pricing in too much optimism. I wouldn’t be looking at buying growth at whatever price, but there’s more growth out there than many people think.

Todd: Where in the world would you weight a global portfolio?

Brian: Maybe it’s not so much about where you invest as it is about what you invest in.

Todd: Great point.

Brian: Many fears have abated and some markets look a little rich, but there’s still opportunity in emerging market debt and equities. It’s just about being a bit more judicious now about whether you are getting risk at a reasonable price.

Todd: Wrapping it up here Brian, I’ll thank Dr. Jay Bryson and invite our listeners to hear your two-part interview with him here on iTunes or on our blog AdvantageVoice®. For now, thank you for being with us today.

Brian: Todd, it’s always a pleasure.

Todd: Until next time, I’m Todd Crawley, and this is The Essential Practice podcast.

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