US President Donald Trump’s aggressive tax cuts has been seen as the catalyst for world economic growth. The IMF (International Monetary Fund) predicts the world’s economic growth to be 3.9 per cent in 2018 which is the largest move in 8 years. If the world is set to experience high levels of synchronised economic growth, then these are the 3 main sectors that need to be on your radar:
This cyclical sector performs well when the economy is doing well. These companies usually have fixed costs which they pay in all economic conditions. So, when the economy is good their margins can increase as their revenues head higher. Companies are also more willing to spend more money on equipment upgrades and shipping when business is going well. Some examples of industrial companies are:
- Transportation –As demand for products increases so does the demand for transportation. These services are still used in slow economic periods but more trains and trucks are utilised in busy periods. Margins can increase for these industries as revenues increase but fixed costs relating to the maintenance and storage remain the same.
- Capital Goods – Equipment Manufacturers. Companies would be more willing to spend more money on equipment upgrades as demand for goods increases.
- Commercial and Professional Service – Packing and Waste Management operations. As manufacturing of goods increase so will the needs for products on packing and waste management companies.
These are stocks in the mining, metals, chemicals and forestry products.
Material stocks tend to go up in value when the economy is strong. As manufacturing beefs up, so does the need for supplies of raw materials to produce their products. Construction also increases when the economy is strong and so is an indicator of market strength. Hence basic materials increase in demand as construction increases.
Gold stocks are also popular in high growth environment when there are rising interest rates. Investors will put their money in gold stock as a hedge if they feel inflation is too high.
A strong economy can lead to stronger consumer confidence which can lead to increased buying in the consumer discretionary sector. Consumers become more positive about their financial position as economic growth increases. This will affect their spending habits and they will be more likely to spend money on non-essential items in the consumer discretionary sector. Consumer discretionary stocks tend to outperform the stockmarket in strong economic periods.
Lauren Hua is a private client adviser at Fairmont Equities.
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