The Fed Pause: A Key Catalyst for Global Equity Markets

We see an improving backdrop for Calamos Global Opportunities Fund (CGCIX), supported by improving macro data and company fundamentals.

• A Fed pause and weakening dollar, which have historically set the stage for strength in non-US equities.
• Low equity valuations, both relative to the US and to historical levels.
• Favorable trends in global earnings revisions and earnings growth.
• Attractive issuance in global convertible securities.

After staring down weaker global growth, aggressive policy tightening, a strong dollar and increased geopolitical tension, global equity markets look to be positioned for brighter days ahead. Since the end of October, we’ve seen the performance of US and non-US markets begin to converge as investors shift their focus from a higher-for-longer rate scenario to contemplating the Fed pause.

The end of a Fed tightening regime has been a key turning point for non-US equities

Over the past 30 years, international equity markets have enjoyed a boost when the Federal Reserve has paused rate increases. The chart below shows the decidedly positive performance of emerging market equities and European equities leading into and in the months following Fed pauses.

Median moves around end of Fed tightening cycle, going back to 1989

As the Fed has become less hawkish, the dollar has trended down

A weaker dollar has also been a tailwind for overseas markets. For most of the past two years, global markets have struggled amid waves of investor anxiety about global growth and interest rates, which were reflected in a strong dollar. As the chart below shows, the dollar went through a period of massive upside in 2021 and 2022. And, from July through October of this year, the dollar staged a major rally in a risk-off environment. However, in the wake of the Fed pause and lower real yields, we've seen the dollar stabilize and depreciate versus many foreign currencies. This move has contributed to a more hospitable environment in the global capital markets, with non-US markets, including emerging markets and European equities, benefiting.

US Dollar Index

Improving Global Fundamentals

In addition to a better macro landscape, we also want to see companies performing better. During the Covid cycle, earnings were all over the map. Companies in Europe and other more trade-oriented economies struggled more than those in the United States. More recently, we’re seeing indications that the skies are brightening for companies around the world, including in Japan and Europe—two regions well represented in Calamos Global Opportunities Fund.  (See our post, “We’re Finding Much to Like in Japan.”)

Global Earnings Revisions: Moving in an Encouraging Direction

Convertible Securities: A potential advantage for Calamos Global Opportunities Fund

Calamos Global Opportunities Fund’s investment universe includes convertible securities, which we believe is a key differentiator. Convertible securities blend characteristics of stocks and traditional fixed income securities, giving our team additional levers for accessing well-priced growth and favorable risk/reward skew. Global convertible issuance has been healthy this year, and we believe this trend should continue in 2024, as companies seek growth capital at lower borrowing costs.

Global Convertible Issuance

As of November 30, 2023. Source: BofA Global Research.

Conclusion

We believe lower inflation and less hawkish central banks, a pickup in growth and higher earnings revisions, and the potential for a stable-to-declining dollar have re-energized the backdrop for global equities and provide strengthening tailwinds for our global strategies, including Calamos Global Opportunities Fund.

Our team manages Calamos Global Opportunities Fund with the goal of providing lower-volatility equity exposure by striking favorable risk/reward skew with more upside than downside over full market cycles. We are pleased to see a growing set of advantaged companies emerge—businesses with rising cash flows and solid balance sheets. The fund continues to emphasize companies that can thrive during all phases of the economic cycle, such as those benefiting from thematic shifts and disruption. From a sector standpoint, we’re finding attractive opportunities in technology, industrials, health care and energy. We’re also finding attractive potential across the capitalization spectrum, including select smaller caps.