Global economic growth has accelerated for the first time in 24 months, creating new opportunities for equity investors, says Wellington Management’s John A. Boselli, CFA, portfolio manager of John Hancock U.S. Quality Growth Fund and John Hancock International Growth Fund. Boselli explains the global cycle index, a proprietary research tool developed at Wellington Management, and discusses how the recently improved outlook has affected sector positioning for these two strategies.
At Wellington Management, we use a global cycle index, which is an index that has seven independent variables. Those including consumer confidence, industrial confidence, capacity, utilization prices, interest rates, employment, and policy uncertainty. Once a month, we solve these variables into an equation, and the output is a single number, and we plot that number over time on a time series graph. And when those data points are upward sloping, the global economic cycle tends to improve with about a two-month lag. And when the global cycle is improving, there's a 70% correlation with broad equity markets. So when the global cycle index is improving, the economic cycle is improving globally. And equity markets tend to improve at the same time. And when that happens, we tend to go overweight stocks that are higher growth, deeper value, more cyclical companies, and we tend to underweight higher quality, higher dividend-yielding stocks.
And when the global cycle index starts to decline, the global economic cycle tends to worsen with about a two-month lag. And when that happens, global equity markets tend to fall with about a 68% to 70% correlation. And with the global cycle index is falling, we tend to go overweight, higher quality, more durable business models that are paying a nice dividend yield to investors, and we tend to underweight the growth and valuation factors at the time. So today, the global cycle index is now upward sloping for the first time in 24 months. And our strategist expects that global cycle index to continue to improve over the next at least three to six months. More data is needed for a longer-term view. And as such, we have now moved to an overweight position in technology and financial services, and we're underweight sectors such as consumer staples and healthcare. So the global cycle index is a very important predictor of stock prices and influences sector allocation in our process.