The U.S. election season is in full swing as polarized presidential candidates trade barbs, the fiscal cliff looms and the American economy grinds through a slow recovery. It’s enough to make some investors look even more closely than they usually do at where to send their dollars abroad.
According to Goldman Sachs Asset Management Chairman Jim O’Neill, there’s good reason to invest internationally: the eight economies that GSAM defines as growth economies–Brazil, Russia, India, China, Indonesia, South Korea, Mexico and Turkey–will contribute around $15 trillion in real terms to the world this decade.
“This contribution will allow for faster, yes, faster, global GDP growth of around 4.2% than for each of the past three decades,” O’Neill wrote in a note published Monday. “Of this $15 trillion, one-half will come from China, and another quarter of the total will come from the other Asian growth economies. This $15 trillion total will be more than twice that of Europe and the U.S. combined.”
To be sure, along with opportunities in international investments during the U.S. presidential elections, there are challenges to be found. The eurozone’s jobless rate rose to a record 11.4% this summer, for example, and China’s manufacturing sector has contracted for 11 straight months.
What’s an international investor to do? In an effort to sort out the pros and cons of international investing during the U.S. election season, AdvisorOne went straight to the source and found some of the best commentary from thought leaders in the asset management industry. Read on for more views from six top analysts, including more from O’Neill, along with currency guru Axel Merk, Martin Leclerc of Barrack Yard Advisors, Loomis Sayles’ David Sowerby, Brandywine Global’s Brian Hess and Accuvest’s David Garff.
Axel Merk, president and CIO, Merk Investments, and Kieran Osborne, senior analyst, Merk Funds
Currency guru Merk and his colleague Osborne write in a Sept. 26 note that the world’s central bankers are willing to step in with more and more liquidity if the global economy shows signs of further weakness. The Federal Reserve, meanwhile, has gone even further by saying its accommodative policies will remain appropriate for a considerable time, likely beyond 2014, after the economic recovery strengthens, Merk and Osborne note.
“In other words, financial markets will be awash with liquidity for an extended period, even if we see signs of a sustainable economic recovery. At first glance, this may appear a positive development for investors holding stocks and other risky assets. After all, [Fed Chairman Ben] Bernanke appears willing to underwrite your investments over the foreseeable future,” they write.
“Ultimately, the Fed may have reached too far, bringing risks to economic stability and elevated levels of volatility,” say Merk and Osborne. “From the Bank of Japan and the People’s Bank of China to the European Central Bank, the Bank of England and the Fed, central bankers are either putting their money where their mouth is (quite literally) or strongly insinuating that continued, ongoing easing policies are needed to prevent another significant downturn in global economic activity. While all the excess printed money may or may not have the desired effect of stimulating the global economy, the money does find its way somewhere; unfortunately, most central bankers appear to fail to realize that they simply cannot control where that money ends up.”
2) International Investments: A Billion People to Enter Middle Class
Martin Leclerc, principal, CIO and portfolio manager of Barrack Yard Advisors in Bryn Mawr, Pa.
A 30-year veteran of the investment management business in the U.S., London, Europe and the Middle East, value investor Leclerc manages a global portfolio that’s heavily weighted toward nondomestic U.S. companies. He asserts in a Sept. 28 phone interview with AdvisorOne that he has yet to see evidence that a U.S. presidential election has any bearing on international stock prices.
Leclerc notes that 2012 is shaping up to look in the U.S. like a typical election-year pattern. “That’s good news because in election years the markets tend to be benevolent, and this year is certainly the case,” he says. “If the presidential cycle remains intact this year, we should see a pullback in stock prices in the next weeks in the short term ahead. There’s usually a correction in October ahead of the election. Then no matter who gets elected, the market tends to rally after that.”
The United States in the past several months has regained its safe haven status and American stock prices have become expensive, which means that investors can find bargains abroad.
“We’re very interested in the presidential election cycle theory, and this year is playing according to script, which means that American stocks relative to European and Asian companies have become more expensive,” Leclerc says. “We view that as meaning there are fewer American investment opportunities to get excited about than in other parts of the world because of the relative expensiveness of American companies.”
What investments does Leclerc like? “Over the next 15 years, it’s projected that a billion people will be entering the consuming classes,” he says, “so we’ve positioned our portfolio for this global middle class. We favor companies that cater to middle class amenities in areas like education, personal vanity products, security, and also infrastructure investments, which we define as everything from traditional ports and roads to financial exchange operators” such as NYSE Euronext.
3) Asia: Quality, Not Quantity
Jim O’Neill, chairman, Goldman Sachs Asset Management
After a quick trip through parts of Asia, O’Neill writes in a Sept. 30 note that the people he met on his route were indifferent to the news of a third round of U.S. quantitative easing by the Federal Reserve.
“I found that most people I met in Asia didn’t seem to think that QE3/QE Infinity was that important a positive for the real economy, with many thinking that it wasn’t the force that would unleash the private sector animal spirits and might only serve to raise inflation expectations,” London-based O’Neill writes, adding that in his own view, “while other policy developments are also necessary, especially from Congress post election, I think the Fed’s decision is a step on the road to nominal GDP targeting. Giving such an asymmetric bias to policy until unemployment figures fall is a big development and positive for both nominal U.S. GDP growth and U.S. and global asset prices.”
As for “the first decade of the Asian Century,” as O’Neill terms it, much of the story has been about the quantity of growth rather than the quality and sustainability. Now, he says, investors should expect to see a China in which the leadership has deliberately decided it doesn’t want to achieve 10% plus real GDP growth anymore, and one that is happier with 7% to 8%. This is especially true for China but also for India, Indonesia and others (but not Japan), O’Neill asserts.
What exactly is O’Neill’s new “quality” China? “I mean a China where we should respect more closely than in the past what the five-year plan outlines in terms of priorities; and in this regard, one in which private consumption becomes a bigger share of GDP at the expense of exports and state-backed investment,” he says.
4) U.S. Stocks: A Slow Grind Upward
David Sowerby, portfolio manager, Loomis Sayles
Echoing O’Neill and Leclerc’s thoughts, Sowerby anticipates that the U.S. presidential election will have less of “a meaningful impact” on foreign stocks than more direct factors abroad.
These factors include:
- Non-U.S. earnings
- European Central Bank and overall central bank easing
- World growth.
Also echoing his colleagues, Sowerby said during a Sept. 26 Envestnet webcast that “almost independent of who is the victor in November, the numbers are the numbers.”
In other words, Sowerby looks for a theme over the next two years of a slow grind here in the United States: “I emphasize grind, for the economy and the outlook for corporate profits, but cash flow looks good. Stocks can still do quite well despite some apprehension on what we’re seeing on the fiscal side and the outcome for tax policy.”
More numbers from Sowerby: there’s a 70% probability that incumbent President Barack Obama will be re-elected. His election view also holds that the Republicans are likely to keep the House, perhaps with a smaller margin, and the Senate is likely to stay close to a 50/50 party split, but with a potential edge for a Republican majority.
Bottom line from Sowerby: the U.S. is looking at good odds of another year of divided government, but stocks will survive. “The market is doing well for two important reasons: Fed easing and S&P 500 ROE of 16%,” he says. “Expected return on stocks has the potential to be 8% to 9% for the rest of the decade.”
5) Fixed Income: Will U.S. Be the Next Europe?
Brian Hess, portfolio manager, Global Fixed Income, Brandywine Global
Regardless of whether Obama or Mitt Romney triumphs on Nov. 6, the winner’s top priority will be addressing the fiscal cliff issues and medium-term fiscal reform in the United States–and that’s what the international markets expect, says Hess in a Sept. 28 phone interview with AdvisorOne.
“It’s pretty clear to most bond investors that the financial markets have been very forgiving of U.S. fiscal policy this year on the expectation that it’s an election year and limited progress is likely to be made on these issues,” he says. “But if we get into 2013 and there is not a credible move toward closing this deficit and stabilizing debt-to-GDP, that’s when I think there could be greater pressure placed on U.S. Treasury yields, similar to what we’ve seen happen in Europe.”
If Washington lawmakers fail to act in 2013, international investors may respond by selling Treasuries in favor of other markets around the world, which would put downward pressure on the dollar, Hess warns.
“It’s very common for a country that’s viewed as fiscally profligate to see its currency weaken,” he says. “I think that’s partly what has happened here in the United States. Since the Great Recession, we have had a Federal Reserve that’s been very active and has helped to keep Treasury yields low in order to support growth, and the burden of adjustment has instead taken place via the dollar, which has weakened against many currencies, but particularly against the currencies of countries that are running smaller deficits and have lower debt-to-GDP ratios.”
6) Country Investment Rankings: Who’s Up, Who’s Down, Who’s Surprising
Garff and the Accuvest investment team have created a ranking model that includes assessing a country’s political risk as one of multiple factors before they invest in a country. With 28 countries in its rankings, the Accuvest model looks at four main components: fundamentals, momentum, risk and valuation. All countries are part of Morgan Stanley’s MSCI All Country World Index, and the higher a country’s political risk score, the less risky that country’s markets are, from Accuvest’s perspective.
The ranking results may surprise investors, considering the chaotic nature of the 2012 U.S. presidential election.
As of Monday, the United States is the No. 1 most attractive country for the first time in seven years, with the highest overall Accuvest risk score, according to Garff.
“Remember that this is all relative to the opportunity set,” Garff said in a Monday phone interview with AdvisorOne. “The U.S. has the highest probability to outperform the rest of the 28 countries in our universe.”
In terms of political risk, the U.S. has a score of 83.5, slightly lower than Germany’s score of 84, and certainly lower than Switzerland’s score of 88. But China’s political risk score is 60.5 while Turkey’s carries the highest risk of the 28 countries with a score of 56.5.
“The way we think about the world is reasonable for investors to think about the world,” Garff concludes. “If you’re trying to buy the cheapest countries, you would end up with a portfolio of countries like Russia and Spain, which aren’t necessarily bad but have risks associated with them. Those are all very interesting from a valuation perspective, but from a risk perspective, you would want to own countries like Canada, the U.S., Taiwan, Brazil and Israel.”
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