Global Allocation Insight

Global trends clear the runway for opportunity

Oct 18, 2018

In a challenging environment for industrials, we see specific
areas that could catch the tailwind of a growing trend.

Globally, the industrial sector is facing a number of headwinds – elevated valuations, a slowing in leading indicators, and weakening demand from China and Europe. The Global Allocation Fund holds an underweight to the sector as a whole; however, despite these obstacles, we see value in specific segments that stand to benefit from the growth of the world’s middle class.

At $40 trillion per year, spending by the middle class accounts for two-thirds of all spending globally and one-third of global gross domestic product. Despite overall moderating global growth, the middle class is expected to continue to grow strongly, with 2% of the world’s population joining the middle class annually. Universally, as a person’s disposable income increases, they tend to spend more on luxury items such as travel.

Global passenger air traffic has been growing steadily and creates opportunities for airlines operating in specific areas of both the emerging markets and the developed world. Notably, within Brazil, passenger traffic is expected to grow at a 10% compounded annual growth rate through the next several years. The Asia-Pacific region is expected to be the source of more than half of the world’s new passengers over the next two decades.

Airline stocks are not the only beneficiaries of this travel growth trend. As more planes take flight, the jet engines that power them are needed in greater quantities, and their increased use leads to more frequent and intensive servicing, driving higher revenues for jet engine manufacturers, which carry high margins.

In the BlackRock Global Allocation Fund, we seek out companies with particularly compelling prospects for capitalizing on this global trend. For example, we hold exposure to companies in Japan that can benefit from the rapid growth of inbound visitors from China. Outbound travel from Japan is also increasing due to income growth and high corporate profits driving increased business travel. The fund’s exposure to Japanese rail companies is focused on the rising prominence of commercialized train stations that have been built up to be fully-integrated service centers with small-scale shopping malls.

Visitor traffic to Japan on the rise
Annual visitors to Japan have tripled over the last decade, creating opportunities for Japanese air and rail companies.

Global healthcare spending on the rise

Source: Japan National Tourism Organization, December 2017.

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Russ Koesterich
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies ...
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