The world is more connected now than it has ever been. A butterfly flapping its wings in the US creates an event in the farthest reaches of the globe in mere minutes, not weeks or months. This is true for communication, not international trade.
According to IronHorse, it seems that as regional economies show positive signs of growth, trade between the economies has been decreasing. The focus on internal growth is further signaled by steps different central banks have taken to keep their economies out of recession. These moves have proven to be a suitable for the near term but long term consequences have yet to be fully understood. Yes, building a solid infrastructure will assist in international trade when it ramps up, but some economies can only be supported internally for so long. An internal focus is not a poor growth strategy, but the possible side effects highlight the need for diversification.
The theme of diversification is equally important when it comes to your portfolio. Not just diversification between equity and fixed income holdings, but also within those broad asset classes. Our investment process, that was formed in academia and refined through experience includes diversification as a central characteristic.
Although diversification is a central point in our intentional investing philosophy it is important to know what is going on in the specific regions.
The questions in US markets continue to be the same: When will the FED start tapering bond purchases? What does tapering mean for the economy, and financial markets?
It is widely thought the FED will start tapering in September, but as it is contingent on a variety of economic measures a start date is not certain. The best estimate is that the FED starts tapering after the economy sees measureable effects from the sequester. Regardless, tapering shouldn’t be such a bad word: it is based positive economic indicators.
What tapering means for the financial markets is slightly different. Remember, tapering does not necessarily go hand-in-hand with an increase in interest rates. Tapering does indicate lower capital spending from corporations, which ultimately puts more emphasis on growth in revenues. As such it is likely that equity markets will see a decrease in forward looking P/E ratios.
International Developed markets have laggard US economic growth, and have therefore seen outflows from their financial markets. An undervalued market combined with central bank stimulus could indicate more robust financial market growth than in the US. However, there are still many issues that need to be resolved, so we remain cautiously optimistic about International opportunities.
Emerging Markets have been, and continue to be hit the hardest as international trade slows. The forced internal development will position these economies for growth in the long run. Of course, investors have to be willing to tolerate significant amounts of volatility for these returns. As such, we remain subdued in our optimism but continue to look for investment openings.