Emerging markets still lagging
The emerging markets, which have been slower to reopen from the pandemic, did get a boost from the recent spike in commodity prices. “Emerging markets are very sensitive to the commodity cycle,” said Monsen, “so a lot of those markets moved up strongly along with the rise in commodity prices. But that seems to have leveled off.”
The longer-term view for the emerging markets is less promising, according to Spangler. “We have some concerns about the emerging markets on a number of levels. They were great beneficiaries of globalization and outsourcing, but we're now in more of a deglobalization phase.”
Prospects in China, which accounts for about one-third of the MSCI Emerging Markets Index, are also a concern. Spangler pointed out that areas such as governance, transparency and geopolitical issues could adversely affect its economy. “China’s economy has been growing tremendously, but its growth is expected to drop to the 5 - 6% range by 2022,” said Spangler. “China has a demographic issue in terms of the aging of its population, as well as tremendous debt issues, and that tends to have a spillover effect to the rest of the emerging markets.”
“As we’ve moved from recovery to expansion, the question I think the markets are grappling with is where we are in the expansion,” explained Spangler. “Are we in the early, middle or late innings?”
The early stages of recovery often lead to a “junk” rally, with low quality, high beta types of securities leading the market, according to Spangler. “But as you move from recovery to expansion, the focus moves to cyclical value and companies with better earnings quality. Then as you move towards slowdown, the market tends to rotate toward more defensive areas, such as larger cap, utilities, staples and more stable big-cap technology types of companies.”
While the U.S. market has enjoyed strong growth with very little volatility recently, Spangler noted that “under the surface there is a lot of turmoil and a lot of rotation going on.” Inflation and actions by the Federal Reserve (Fed) could influence the direction of the stock market in the months ahead.
“If inflation is indeed transitory, as the Fed says, then we would expect a more risk-tolerant market with leadership from small caps and cyclicals,” said Spangler. “But if the Fed is wrong and inflation exceeds their targets and gains traction, then the market may expect the Fed to taper its bond buying earlier than expected and pull forward rate increases – the proverbial case of the Fed pulling the punch bowl away from the party. Without the monetary support from the Fed, we could see a market correction.”
Facing a variety of potential scenarios, Spangler and Monsen believe the best course forward is to maintain a balanced portfolio. “What we try to do with Thrivent Global Stock Fund is run a nice diversified portfolio of global equities, diversify our managers, diversify our strategies, and position our portfolio at the margin for where we think we are in the economic cycle,” said Spangler. “That's why we are overweight domestic large caps and growth, while within international, we are a little overweight in Europe and a little underweight in the emerging markets.
“We believe we're in the earlier to middle innings of economic expansion,” added Spangler. “But we still see some cause for caution – and that's how we're currently positioned.”
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