World Trade Powering Global Economic Growth

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1 WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS Peter Donisanu Investment Strategy Analyst World Trade Powering Global Economic Growth August 1, 217 Key Takeaways» Evidence is mounting that global economic growth is recovering, and in some cases, progressing faster than forecasters have expected.» We believe that a strong rebound in trade is one key indicator of the recovery in many major world economies. What it May Mean for Investors» We expect global equities to benefit from the improving economic environment as earnings rise, and we anticipate increased bond volatility as monetary policy tightens. Evidence is mounting that global economic growth is recovering, and in some cases, progressing faster than forecasters have expected. For instance, our Wells Fargo Investment Institute (WFII) Economic Diffusion Indices, which track 1 broad measures of activity relative to their five-year averages (such as business sentiment, trade, and retail spending), continue to reflect broad improvements in major economies as illustrated in Chart 1. These developments recently have become more pronounced outside of the U.S., yet we believe that the improving trend is truly global in nature. Chart 1. Global Economic Activity Appears to be Strengthening Index Level Developed Economies Jul-1 Nov-1 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Developed Economies Developed Economies Excluding the U.S. Index Level Jul-1 Nov-1 Emerging Economies Emerging Economies Emerging Economies Excluding China Emerging Excluding Brazil & Russia Source: Wells Fargo Investment Institute, Bloomberg; 7/19/17. Past performance is not indicative of future results. The Wells Fargo Investment Institute (WFII) Economic Index is a composite measure of changes in a given country s key economic metrics relative to a rolling five-year rolling lookback period. Metrics tracked include labor and productivity, trade, inflation, monetary conditions and consumer spending. A score above zero represents expansion with a score below zero represents contraction. An index is unmanaged and not available for direct investment. Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul Wells Fargo Investment Institute. All rights reserved. Page 1 of 6

2 Indeed, in the April version of the International Monetary Fund s (IMF) biannual World Economic Outlook, forecasters revised expectations of global economic growth higher for the first time in years on account of better-than-expected recovery in global investment, manufacturing, and trade activity. In July, growth prospects were revised higher for the economies of the Eurozone and Japan, while U.S. growth was trimmed lower on account of political gridlock. We believe that global equities should benefit from higher corporate earnings as the economic environment improves. For bonds, we anticipate higher levels of volatility as markets price in tighter monetary policies as a result of stronger growth and higher inflation expectations. Yet, we expect these policies to remain largely accommodative through year-end. Chart 2. Exports Are on the Rise in the World s Largest Economies Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Oct-1 Nov-1 Dec-1 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Source: Wells Fargo Investment Institute, Bloomberg; 7/19/17 United States Eurozone Japan China Global Trade Activity Positively Contributing to Growth We believe that the global trade in goods and services has played a key role in the brighter outlook for the global economy. Trade (a key measure within our WFII Economic Diffusion Indices) has accelerated over the past nine months. According to data from the Netherlands Bureau for Economic Policy Analysis (CPB), the total volume of goods exported around the world has expanded at its fastest pace in over two years. Government reports from the U.S., Eurozone, Japan, and China have also corroborated this claim (Chart 2). We believe that stronger trade data may point to higher levels of global economic activity over the next 12 months. For example, when we plot global trade data from the CPB and global gross domestic product (GDP) growth from the IMF (Chart 3), we find that global GDP lags trade data by one year. This means that higher levels of trade today could foretell higher levels of GDP growth in the months to come. While this relationship between trade and growth may vary on a country-by-country basis, we believe that activity related to rising business consumer demand may lead measured economic growth at a broader level. 217 Wells Fargo Investment Institute. All rights reserved. Page 2 of 6

3 Equities may Benefit from Corporate Earnings; Expect Bond Market Volatility During an economic downturn, global trade typically slows as firms put off replacing aging equipment or opening new factories and households delay replacing aging cars or purchasing new homes. In an environment of subdued spending, corporate earnings often decline as spending activity weakens, placing downward pricing pressure on suppliers. These developments can prompt central banks to cut key interest rates in an effort to underpin inflationary pressures, employment, and economic activity. From a textbook perspective, global equity markets often keen to future earnings prospects of corporations face downward pressure as investors recalibrate price expectations to lower commensurate earnings. Global bond markets also may face heightened volatility as changes in central-bank policy cause market participants to lower interest-rate expectations and increase demand for safe-haven assets. Looking around, we believe that many of the economic and market data we follow are telling the opposite of such a recession-era tale. Chart 3. Growth in World Economic Output Appears to Lag World Trade by One Year CPB World Trade -- Left Axis IMF World GDP Growth (Lagged 1 Year) -- Right Axis Dec-1 May-2 Oct-2 Mar-3 Aug-3 Jan-4 Jun-4 Nov-4 Apr- Sep- Feb-6 Jul-6 Dec-6 May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr Source: Wells Fargo Investment Institute, Bloomberg; 7/19/17 Indeed, we believe that today s signs of economic stabilization (particularly evidenced in trade data) reflect a pivot point toward economic expansion from an economic downturn. As corporate earnings rebound to help lead the economic recovery (Chart 4), global equity-market participants may once again recalibrate price expectations, this time to the upside, in anticipation of higher earnings likely supporting higher global equity prices. During an economic recovery, global fixed-income investors may yet face bond-market volatility, this time as central bankers normalize (raise) rates, setting market expectations for higher yields (albeit below historical averages in today s market environment). 217 Wells Fargo Investment Institute. All rights reserved. Page 3 of 6

4 We believe that the global economy has stabilized and is in the process of accelerating. We expect growth to be higher in 217 for many major economies (except that of China). For equities, we expect index-based equity strategies to post modest gains throughout the remainder of the year. Nevertheless, we believe that as the economic recovery cycle further develops, investors may be best served by being more selective in their portfolios and favoring active over passive strategies in the U.S. and in international equity markets. Our tactical guidance for global equities remains neutral, but rank-wise, we prefer allocating new money to developed markets first, then emerging markets, and finally, to the U.S. While we expect a modest rebound in global economic growth this year, we expect inflationary pressures to remain subdued throughout the rest of the year. As such, we believe that global central-bank policies largely will remain accommodative. We anticipate approximately one more rate hike by the Federal Reserve this year. We also believe that central bankers in Europe and Asia are likely to maintain accommodative policies through year-end, despite heightened levels of bond market volatility over the past month due to European Central Bank (ECB) policy-tightening concerns. Chart 4. Global Equity Earnings Recovery Leads Global Growth by One Year MSCI ACWI Index EPS -- Left Axis IMF World GDP Growth (Lagged 1-Year) -- 1 Right Axis Source: Wells Fargo Investment Institute, Bloomberg; 7/19/17. Past performance is not indicative of future results. MSCI AC World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Index consists of 46 country indices comprising 23 developed and 23 emerging market country indices. An index is unmanaged and not available for direct investment. In general, we favor higher credit quality for fixed-income investments today, and prefer U.S. fixed-income investments over those of lower-yielding developed-market bonds abroad. While the U.S. dollar has faced some near-term weakness, we still expect the currency to strengthen through year-end as interest rates diverge. For emergingmarket bonds, while we expect rates to remain higher than those in the U.S., we recommend dollar-denominated exposure to help mitigate currency-related volatility. 217 Wells Fargo Investment Institute. All rights reserved. Page 4 of 6

5 Economic Calendar Date Report Estimate Previous 8/1/217 Personal Income.4%.4% 8/1/217 Personal Spending.2%.1% 8/1/217 Real Personal Spending --.1% 8/1/217 PCE Deflator MoM.% -.1% 8/1/217 PCE Deflator YoY 1.3% 1.4% 8/1/217 PCE Core MoM.1%.1% 8/1/217 PCE Core YoY 1.4% 1.4% 8/1/217 Markit US Manufacturing PMI /1/217 ISM Manufacturing /1/217 ISM Prices Paid -- 8/1/217 ISM New Orders /1/217 ISM Employment /1/217 Construction Spending MoM.%.% 8/1/217 Wards Total Vehicle Sales 16.78m 16.41m 8/1/217 Wards Domestic Vehicle Sales m 8/2/217 MBA Mortgage Applications --.4% 8/2/217 ADP Employment Change 19k 18k 8/3/217 Challenger Job Cuts YoY % 8/3/217 Initial Jobless Claims k 8/3/217 Continuing Claims k 8/3/217 Bloomberg Consumer Comfort /3/217 Markit US Services PMI /3/217 Markit US Composite PMI /3/217 ISM Non-Manf. Composite /3/217 Factory Orders 1.9% -.8% 8/3/217 Factory Orders Ex Trans % 8/3/217 Durable Goods Orders -- 6.% 8/3/217 Durables Ex Transportation --.2% 8/3/217 Cap Goods Orders Nondef Ex Air % 8/3/217 Cap Goods Ship Nondef Ex Air --.2% 8/4/217 Change in Nonfarm Payrolls 183k 222k 8/4/217 Two-Month Payroll Net Revision -- 47k 8/4/217 Change in Private Payrolls 18k 187k 8/4/217 Change in Manufact. Payrolls 8k 1k 8/4/217 Unemployment Rate 4.3% 4.4% 8/4/217 Average Hourly Earnings MoM.3%.2% 8/4/217 Average Hourly Earnings YoY 2.4% 2.% 8/4/217 Average Weekly Hours All Employees /4/217 Labor Force Participation Rate % 8/4/217 Underemployment Rate % 8/4/217 Trade Balance -$4.6b -$46.b 8/7/217 Labor Market Conditions Index Change /7/217 Consumer Credit -- $18.41b 8/7/217 Mortgage Delinquencies % 8/7/217 MBA Mortgage Foreclosures % Source: Bloomberg as of 7/27/ Wells Fargo Investment Institute. All rights reserved. Page of 6

6 Risk Considerations All investing involves risk including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 6 of 6