Warren Buffet is quoted as once saying that when the tide goes out, you find out which investors are swimming naked.1 In reference to the global economy, an analyst recently annotated that remark by saying that when the tide went out in 2008 – the Chinese had on a full wet suit.2
In other words, if it had not been for China and other emerging market (EM) countries, the world economy might be vastly worse off than it is today. When you consider estimated outlooks for growth for 2012, analyst numbers average out at around 1.8% for the US and 1.2% for the European Union. However, total global growth is forecasted at 3.9% – boosted by the 6.2% growth anticipated by the EM economies.
Currently two-thirds of the world’s economic growth is coming from EMs – not from the US and not from Europe. However, according to studies by Merrill Lynch, the average US investor portfolio has only 3% exposure to EMs. This suggests that US investors – despite our pessimism for both the US and European financial markets – are vastly underinvested in the markets that are responsible for a majority of today’s economic growth.
CLICK HERE to view video of the interview with global analysts at Merrill Lynch Wealth Management; November 2011.
One thing to bear in mind is that in recent years, it’s become evident that emerging market equities are inversely correlated to the US dollar. In other words, when the dollar strengthens, EM equities tend to decline. This is because a rising dollar drains liquidity from EMs as investors shift to dollar-denominated assets.
Currently, the dollar is strengthening, so it’s reasonable to assume that EM equities will continue to weaken. While this means that these securities are vulnerable to short-term moves, you can actually “hedge” this weakness with a traditional buy-and-hold strategy. According to recent analysis by Morgan Stanley Smith Barney (MSSB), while short-term volatility based on dollar momentum may influence price movements, it has little to do with overall stock fundamentals.
The MSSB report asserts, “We still expect EM economies to outperform the developed economies in terms of economic growth. This should keep capital flowing to the emerging markets.” Furthermore, EM markets do not have the debt burdens of more developed nations, and have more options for fiscal policy flexibility.
CLICK HERE to read Morgan Stanley Smith Barney’s On the Markets report for November, 2011.
An emerging markets portfolio manager at Fidelity Investments recently commented that, despite short-term concerns, emerging markets are supported by long-term favorable demographics, rapid urbanization, and rising levels of wealth that will lead to increased consumer spending. Furthermore, several EMs had already engaged in deleveraging at the government, corporate and consumer levels over the last decade, so they are currently better positioned than the developed world to prevail in this environment of uncertainty.
to read Fidelity Viewpoints “Is the emerging markets ride over?” November 8, 2011.
This is not to say that pessimism about America’s future should overly influence your investment decisions. All foreign securities are subject to interest-rate, currency-exchange-rate, economic, and political risks, and these characteristics are all the more magnified in emerging markets.
Remember, too, that the US is still the biggest and safest bet in the world, and our markets have actually outperformed in 2011 relative to other contenders. Some of our most successful companies have healthier balance sheets now than ever and hold market share lead positions – offering tremendous investment opportunities for investors who have fled to cash and safety over the past couple of years.
However, if you’re wondering how to invest in the current economic environment, it may behoove you to embrace a more global perspective going forward. Seek out investment opportunities for growth, income and value where they currently exist – and many of them exist outside of the US. The following are a few guidelines to help you with this mindset:
- Strike an appropriate balance between equities and debt in both emerging and developed markets
- Evolve a buy and hold strategy to review your asset allocation more frequently, gear it toward a very specific goal and time horizon, and be vigilant regarding the transparency and reliability of your plan
- Rebalance more often and use new cash (if possible) to shore up underweight allocations to avoid tax consequences
- Broaden your mindset for different global asset classes, such as commodities, currencies, real estate, etc.
Please contact us if you are interested in discussing the broader world of opportunities you can invest in for your future.
1 www.brainyquote.com/quotes/authors/w/warren_buffett.html. Accessed 11/21/2011.
2 “The Great Global Shift: New World, New Rules.” October 18, 2011.