Opportunities For Growth In Evolving Markets
Steady economic growth
The U.S. economy showed weakness in the first quarter, but that is typical in the first quarter of each year and the economy seems to be rebounding. We’re watching closely for any changes in the corporate tax structure and any indication of an infrastructure plan that could have any near-term impact. Beyond the actual passage of any legislation, we’re watching for any short-term impact on business confidence, which has been important since the U.S. presidential election last year.
Economic stimulus in China has faded somewhat as a market factor this year. That is due in part to the Chinese government trying to balance infrastructure-driven stimulus and its housing market with a restructuring of the economy, state-owned enterprises (SOEs) and commodity oriented SOEs, and lately the financials market and the “shadow banking” system in China. The government appears to be focused on balancing controls on these areas with its growth plans, and that process is worrying the markets a little now.
We added to holdings in a couple of Chinese banks in addition to a more general increase in the financial sector position. Our largest holding in China remains AIA Group Ltd., a Hong Kong-based insurance company. Overall demand for insurance products in China, Hong Kong and other Asian markets remains strong. The Shanghai government recently published a five-year plan that included a push toward increased insurance penetration there, so we believe the backdrop is good for that long-term holding in the Fund.
We have shifted more exposure in the Fund to Europe, where we still are finding pockets of relative value. We think a key question is how rapidly Europe’s economy can continue to rebound, especially if China’s economy slows a bit. More importantly, we are alert to what that may mean for the European Central Bank and its quantitative easing policy, the value of the euro versus the U.S. dollar and dollar strength in general.
A look at sectors
We have added to the Fund’s holdings in the industrials sector through a number of new positions. In the last several years, most industrials exposure was in aerospace, defense and some transportation stocks. We have broadened our exposure over the last several months, focusing on areas in which valuations have yet to discount sustained improvement. In our view, a number of large companies based in Europe that have products in multiple industries now offer a more attractive valuation while providing similar end markets and geographic exposure. We think the broader geographic and end-market mix may be useful if global economic growth becomes less synchronized in the future.
After positive performance in 2016, we think the energy sector may be settling into a consolidation phase. The Organization of Petroleum Exporting Countries (OPEC) and non-member oil producers led by Russia agreed at a meeting May 25 to extend the production cuts they agreed to last year until March 2018. The oil-producing countries seek to reduce what they consider a global glut of crude oil that has sharply pressured prices – and producers’ revenues – during the past three years. OPEC’s cuts have helped push oil above $50 a barrel this year. The price rise this year also has prompted renewed activity from U.S. shale oil producers, who are not part of the agreement to hold the line on production. We think this agreement may allow the energy sector to find a price bottom and start to consolidate.