The following is an excerpt from Scott Barlow's collection of 10 charts that will define the markets in 2017. To view the entire series, click here.
How economic forecasts can lead directly to successful investments is what's highlighted in this chart. It seems simple at first, the FTSE global index of cyclical stocks divided by the index of defensive equity sectors, but the five-year trend has important implications for investment strategy.
The FTSE All World Cyclicals Index tracks prominent global stocks in industries sensitive to the global economy. This includes industrials, commodities, transportation and consumer finance. The current top positions in the index are (in order): General Electric, Toyota Motor, Samsung Electronics, oil services giant Schlumberger, Goldman Sachs and 3M.
The FTSE All World Defensives Index does the opposite – tracking the progress of market sectors least affected by economic growth levels. Consumer staples, health care, utilities, and brewers and distilleries are includes in the index. Top positions include Johnson and Johnson, Nestle, Procter & Gamble, Pfizer, and PepsiCo.
Importantly, the defensives index is dominated by the type of slow-but-consistent earnings growth, dividend-paying stocks that have been extremely popular with investors in the post-crisis period.
A falling line on the chart indicates that stable dividend stocks are outperforming sectors that benefit from economic growth levels. This was the case from 2011 until February, 2016. After that point, growth-oriented investments began to outperform as the U.S. economy strengthened and the larger emerging market economies like China stabilized. Global cyclical stocks have been outperforming for the past 10 months.
More strength in the global economy will see the line on the chart continue higher. Investors in sectors like mining, energy, industrials and railways will benefit while those clinging to utilities and consumer staples investments are likely to underperform.