April 16, 2019

Financial headlines continue to show a steady stream of stories about major economies struggling with negative data, despite the market’s anticipation of a second-half 2019 pickup. Interest rates have been grinding lower in Europe and Japan while holding steady in China and the U.S. This week’s release of retail sales in China and consumer prices in Europe will shed more light on the pace of economic activity.

There is no shortage of mixed signals amid the flood of data points, commodity price swings, and first-quarter earnings that will cross the tape this week and next. Investors have to contend with weakening macro data being offset by the highest prices for WTI crude oil (nearly $64) in four months.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Copper prices, historically a leading indicator of future industrial production and construction growth, are also trading higher over the past six weeks. High-grade copper for October delivery is trading a shade below $3.00 per pound. Using a six-month contract lends some credence to the notion that demand for both oil and copper will be fairly decent in the fall, in light of a current shortage in copper stockpiles.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Both of these price trends clearly run counter to the bearish global growth forecasts. Pure commodity plays like BHP Group (BHP) and Rio Tinto plc (RIO) are trading at 52-week highs. (I have no position in either). This is a bit of a head-scratcher because China and Japan are the two largest importers of copper, while China is the largest importer of oil and Japan is the third largest importer of oil.

On the other hand, the yield on the German 10-year bond has fallen to 0.05% and the Japanese 10-year bond yields a negative -0.06%. Meanwhile, the U.S. 10-year Treasury is trading at a comparatively luscious 2.57% yield – and drawing foreign capital from around the world as the go-to haven for yield.

Add to this split personality of the global bond markets the record dividend increases, stock buy-backs, mergers and acquisition, a strong dollar, low inflation, and a dovish Fed – and the path of least resistance for U.S. stocks is higher. The U.S., which accounts for 25% of total global GDP, is looking like it will lead the world economy out of its soft patch, even as President Trump levels the playing field with China.

For now, China seems to be functioning just fine with the modified tariffs in place. The latest round of upbeat manufacturing data out of China was a real head-turner as global equities rallied to their highest levels in six months after a second batch of data showed that the China services sector had risen to a 14-month high in March – all during a time when tariffs continue to be fully in place.

The Shanghai Composite is up 9.3% year-to-date and the Euro Stoxx 50 Index is up 15.2% year-to-date. This is hardly the price action of two economies headed into deep recession, even though Italy is already in recession territory. But economic forecasts for GDP growth in Germany for 2020 are expected to rise from a current 0.6% to a 1.5% annual pace. This is likely the catalyst driving the Stoxx 50 Index higher.

High-Tech REITs Offer Strong Growth and Juicy Yields

As investors try to make sense of all the perplexing data that feeds the bull/bear debate on an almost hourly basis, there are some truly powerful secular trends in place that are, in my view, quite suitable for investors seeking good yields and predictable revenue and earnings growth. I’m speaking of the cloud computing market, which is expected to reach $441 billion by 2020, according to Gartner.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Gartner predicts that by 2021, 28% of all IT spending will be for cloud-based infrastructure, middleware, application, and business process services. A new market study, titled “Discover Global Cloud Computing Market Upcoming Trends, Growth Drivers and Challenges,” predicts that over the next five years the Cloud Computing market will register a 30.6% Compounded Annual Growth Rate (CAGR) in revenue. The global market will reach $1.82 trillion by 2024, about five-fold higher than expected 2019 revenues.

Within this megatrend lie the Data Center REITs, of which there are five distinct companies within the NAREIT All-REIT Index. As a group, they generate high single-digit revenue growth and double-digit earnings growth, with a history of strong dividend growth. If bought in equal amounts, these fab-five data center REITs sport a blended dividend yield of 3.35%, contending with utilities and consumer staples for highest defensive sector yields, but with a much higher growth rate.

So, while investors try to make heads or tails of global growth prospects, betting on the future of America’s biggest data center operators looks like a nearly-sure thing.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. *All content of “Income Mail” represents the opinion of Bryan Perry*


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