The International Monetary Fund (IMF) recently released its World Outlook forecast, and its projections were not positive. The global economic recovery will continue to be uneven, and global growth won’t be as high as it predicted previously—slipping a bit this year to 3.5%. So what does this mean to Global Income Edge investors? Here are some questions and answers based on reader feedback.

Q) As a result of a stronger dollar, the IMF downgraded its U.S. forecast for the year to 3.1%, a 0.5 percentage point drop from the fund’s last outlook in January. Further, the IMF finds that potential GDP growth in future years could be slower at 2%.  How does this affect your latest call to Buy American?

A) The IMF revision doesn’t change our U.S. investments or our Buy American thesis. We’ve been acutely aware of the strong dollar’s potential drag on the U.S. economy for months (see our October report, The Problem with a Strong Dollar).  The strong dollar means a less competitive export sector, and so we have mainly avoided U.S. multinationals in favor of domestic U.S. firms that have pricing power such as telecoms and utilities.

And we’ve made investments based on two strong trends.  So we have added companies that will capitalize on the aging population and companies the will profit from rebuilding America’s infrastructure.

Q) The IMF has upgraded its GDP growth forecast to the Eurozone to 1.5%. Is it time to invest more companies on the Continent as opposed to the United Kingdom where Global Income Edge has a substantial position?

A) Given the continued uncertainty of a possible Greek exit from the Eurozone and the potential for a contraction, we continue to be cautious. Only recently, Morgan Stanley said the European economy could contract by 0.2% this year if the currency union crumbles, compared with projected growth of 1%+ if it manages to stay together.

Our portfolio has heavily favored the United Kingdom, and we have been rewarded with exceptional performance in an economy that the IMF describes as “solid.” The fund forecasts “continued steady growth” at 2.7% GDP this year, supported by lower oil prices and improved financial market conditions.   

As I’ve noted, our portfolio of British firms has been the ideal way to play Europe, the U.S. and emerging markets. That’s because many of the UK holdings are diversified across the world. And given the strength of the British Pound Sterling, these firms generally pay superior dividends, and would be generally more insulated from a euro zone collapse.   

Meanwhile, I’m hopeful that the Greece situation will settle soon, and I’m encouraged by the progress of Europe’s $1.1 trillion stimulus program. Only recently Mario Draghi, the head of the European Central Bank, said there was “clear evidence” the monetary policy measures have been effective. But even so, at this point it’s just too risky for income investors to take on direct exposure to the Continent. 

Q) The IMF forecasts a continued slowing of growth in emerging markets such as Latin America and in Asia. Why did Global Income Edge recently take investments there and does slowing growth in those regions change your view of multinationals with exposure to emerging markets?

A) Over the years growth has been tepid in developed economies and somewhat stronger in emerging markets. In this new normal, world investors cannot afford to simply invest in developed economies, as growth rates in them will not be enough to provide high enough returns for retirees.

It has been my thesis that many global multinationals with investments in both developing and developed nations are best positioned to bridge the growth gap and offer lower risk. And for those looking for high flyers, there are still high growth income opportunities in emerging markets, particularly given that emerging markets have been oversold recently. We recently added a solid Brazilian bank and Chinese utility to the portfolio that have solid fundamentals.

Q) Why did you recently add a Real Estate Investment Trust portfolio? How do REITs fit in with you investment thesis?

A) Various economic indicators that indicate we could see a sharp correction in equity markets in the U.S.  Not only do REITs offer high yields, they usually move independently from stocks. While your stocks are declining, your REITs may be increasing, so adding them to your portfolio decreases its volatility. The portfolio contains different types of REITs that specialize in mortgages, healthcare, and commercial and U.S. government real estate.

In a recently released report, entitled “Quicksilver Markets,” the U.S. Treasury argues that by various measures the markets appear overvalued and due for a sharp correction.

“Although no one can predict the timing of market shocks, we can identify periods when asset prices appear abnormally high,” the government’s Office of Financial Research observed.

This concern over a possible correction that we argue for income investors to be in solid firms with pricing power, and diversified across geography and asset class, such as real estate.

For subscribers, in our latest issue we debut our new portfolio of 8 REIT stocks and two new additions to the global income portfolios.  

Portfolio Update

ABB (NYSE: ABB) won a $100 million contract to provide components to the Lingzhou Shaoxing project in China, one of the largest ultra-high voltage direct transmission links in the country.

The Lingzhou-Shaoxing project allows electricity from remote power plants in China to supply electricity to urban areas up to 1,700km away. The ultra-high voltage means that power can travel long distances with minimal power loss.

The order will be recorded on the company’s books for the first quarter. ABB continues to add new contracts to add to its order books. Last month, the company won a $900 million contract for the Nordlink project from German companies.

Yielding 2.75%, ABB is currently a Buy up to $30.

–Khoa Nguyen