Global markets have continued to grind higher in recent weeks despite volatile headlines thanks largely to supportive medium-term market fundamentals. In particular, economic growth across major economies is hitting 7-year highs while the recovery has broadened out into a global synchronized upturn for the first time since the 2008/09 financial crisis. We expect this to continue into 2018 as well with unemployment rates remaining low and central banks keeping monetary conditions at stimulative levels despite some very modest interest rate hikes. Most of our indicators point to ongoing economic recovery with the earliest start to a recession pointing to 2019 with many indicators suggesting this may not start until 2020. Thus, there remains ample time left in the current equity bull market to view any near-term pullback (5%-10%) in stock markets as an attractive opportunity to put cash to work. We believe investments closely correlated with economic growth trends (cyclical assets) should outperform given our constructive global macro-economic outlook.
In our opinion, BBD is trading ~30% of its ownership interest in the CSeries for the strategic benefits of partnering with Airbus and safeguarding the CSeries’ sales potential in the U.S.. This deal should help to further de-risk this aircraft program as it transforms a significant competitor into a partner. We estimate that the potential lost value in terms of reduced stake is in the range of $600M-$900M which can be easily eclipsed by the value creation which Airbus brings to the table. Furthermore, with the CSeries program on shaky ground, there is very little (if any) value being ascribed to this program in the shares today so we expect that the shares should react positively to this news. Almost all of the value in BBD emanates from business jets & transportation and this deal should help to focus more attention on both those segments.
Global markets have remained in a buoyant mood in recent weeks thanks to a steady stream of positive economic data and supportive monetary/fiscal policy developments. We have always maintained an optimistic outlook with respect to the ability of this current business cycle to continue generating healthy, albeit historically modest, growth. Recent data, however, has been beating expectations consistently with global growth climbing to 6-year highs and (even more impressively) broadening out to all major regions and economies. Falling unemployment rates, expanding business spending on capital expenditures and new highs in manufacturing activity are helping to provide an added boost to this current expansion phase which is in its 9th year.
Global macro momentum continues to surprise to the upside, most regions are posting significant year-over-year PMI improvements, and Central Bank bias is slowly shifting toward normalization. Yields have increased since June, and although the pace of monetary normalization is expected to remain gradual, we see further upside risk to bond yields.
Robust PMIs and a weaker U.S. dollar are currently translating into positive earnings visibility, thus supporting mid-teen gains for the MSCI AC World in 2017. Emerging market leadership (MSCI EM +25% YTD; LatAm +25%) is coherent with broad growth, Fed tightening, and rising yields. Canada, Brazil, and Chile are outperforming the S&P 500 since the first fed rate hike in December 2015, similar to behaviour experienced during the previous tightening cycle (2004-2006).