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07-07-2010, 11:31 PM
منقول للفائدة
?Which way(s) will world markets go
They probably won't move in step over the next few months. Emerging economies may be on the upswing, while developed nations may not be so lucky. What's an investor to do ?
By Jim Jubak
It may not look like it, but the world's stock markets are about to start moving in different directions.
That's certainly not at all clear now. Most days recently, all the world's stock markets have moved in the same direction: down. On June 29, for example, the U.S. Standard & Poor's 500 Index ($INX) dropped 3.1%, Germany's DAX Index fell 3.3%, and China's Shanghai Composite Index plunged 4.3%.
But I think sometime in the not-too-distant future -- the next three to six months would be my best guess -- the stock markets of the developed and developing worlds will start to diverge. Six months from now -- or less -- stocks in China, Brazil, India and many other developing markets will be in clear uptrends, and stocks in the developed economies of Europe and Japan will still be stuck in decline. The United States will be left in the middle, straddling the divide between the two groups.
Why?
Because the underlying economies are headed in radically different directions within that time period. And where the economic fundamentals go, stocks eventually follow.
If I'm right, this divergence should be the cornerstone of your investment strategy over the next year or longer. And, if I'm right, how you allocate your portfolio between these two diverging blocks of economies and markets will determine how well your investments perform during that period.
Let me lay out the case for this divergence in the economic fundamentals and stock markets. And then you can judge for yourself if I'm right or not.
The problem with fixing the problem
The recent G-20 meeting of the world's largest economies marks a good starting point for looking at the economies of the developed world.
?And when we look, what do we see
Annual government budgets that are deeply in the red. The U.S. budget deficit is forecast at 10.6% of GDP in 2010. The United Kingdom's is forecast at 10.1%. Spain's is forecast at 9.1%; France's, 8%; Japan's, 6.4%; Germany's, 5.5%.
?How bad are those numbers
Economists estimate that a budget deficit of 3% of GDP is sustainable. Above that, a country is piling up debt that it can't repay under reasonable assumptions of growth (and manageable inflation). In the long run, that leads to falling growth rates, climbing interest rates and finally fiscal crisis.
That's why the final communiqué from the G-20 made such a big deal of two deadlines. First, leaders of the G-20 agreed that they would aim to cut their annual deficits in half by 2013 and, second, aim to stabilize or reduce the total government debt-to-GDP ratio by 2016. That's tantamount to a call to reduce annual budget deficits to 3% of GDP or less.
The leaders of the G-20 were careful not to call any of this an actual agreement or even a promise. These were goals, aims, expectations. (For more on exactly what the G-20 meeting did or didn't achieve, see this post on my website.)
But still, as loose as the timing in these aims is, as vague as these promises turn out to be, as good as the odds are that no country in the group will actually achieve these goals, the agreement does indeed describe a broad economic trajectory that goes like this: High-deficit developed countries will cut government spending over and over during the next five years or so. The cuts aren't likely to be serious enough to end the debt crisis in these economies, so the total package over time will include less government spending, higher taxes, slower economic growth and rising interest rates.
As a fuel for stocks, that's got about as much bang as a wet squib a week after the Fourth of July. But that's the course that countries such as France, Spain, the United Kingdom and maybe even Germany have chosen.
Contrast that with the path that the world's big developing economies are headed down in the years from now to 2013 or 2016, the years in the G-20 news release.
Brazil, India, China and other developing nations don't have huge debts from the financial crisis and subsequent stimulus spending to pay off. For example, Brazil's government deficit is currently running at about 3.24% of GDP. The International Monetary Fund estimates that the ratio of government debt to GDP in developed economies will rise to 110% by 2015 from 91% at the end of 2009. In comparison, in April 2010 Brazil's government debt amounted to just 42% of GDP and is headed down to 30% of GDP by 2014, the Brazilian government estimates.
That's not just the stabilization that the G-20 aimed for as a goal by 2016 in its recent news release -- it's an actual decrease in the burden of government debt on the economy. And the decline in debt and the restrained spending pattern are among the reasons Brazil earned its first-ever investment-grade rating from Standard & Poor's this year.
?Which way(s) will world markets go
They probably won't move in step over the next few months. Emerging economies may be on the upswing, while developed nations may not be so lucky. What's an investor to do ?
By Jim Jubak
It may not look like it, but the world's stock markets are about to start moving in different directions.
That's certainly not at all clear now. Most days recently, all the world's stock markets have moved in the same direction: down. On June 29, for example, the U.S. Standard & Poor's 500 Index ($INX) dropped 3.1%, Germany's DAX Index fell 3.3%, and China's Shanghai Composite Index plunged 4.3%.
But I think sometime in the not-too-distant future -- the next three to six months would be my best guess -- the stock markets of the developed and developing worlds will start to diverge. Six months from now -- or less -- stocks in China, Brazil, India and many other developing markets will be in clear uptrends, and stocks in the developed economies of Europe and Japan will still be stuck in decline. The United States will be left in the middle, straddling the divide between the two groups.
Why?
Because the underlying economies are headed in radically different directions within that time period. And where the economic fundamentals go, stocks eventually follow.
If I'm right, this divergence should be the cornerstone of your investment strategy over the next year or longer. And, if I'm right, how you allocate your portfolio between these two diverging blocks of economies and markets will determine how well your investments perform during that period.
Let me lay out the case for this divergence in the economic fundamentals and stock markets. And then you can judge for yourself if I'm right or not.
The problem with fixing the problem
The recent G-20 meeting of the world's largest economies marks a good starting point for looking at the economies of the developed world.
?And when we look, what do we see
Annual government budgets that are deeply in the red. The U.S. budget deficit is forecast at 10.6% of GDP in 2010. The United Kingdom's is forecast at 10.1%. Spain's is forecast at 9.1%; France's, 8%; Japan's, 6.4%; Germany's, 5.5%.
?How bad are those numbers
Economists estimate that a budget deficit of 3% of GDP is sustainable. Above that, a country is piling up debt that it can't repay under reasonable assumptions of growth (and manageable inflation). In the long run, that leads to falling growth rates, climbing interest rates and finally fiscal crisis.
That's why the final communiqué from the G-20 made such a big deal of two deadlines. First, leaders of the G-20 agreed that they would aim to cut their annual deficits in half by 2013 and, second, aim to stabilize or reduce the total government debt-to-GDP ratio by 2016. That's tantamount to a call to reduce annual budget deficits to 3% of GDP or less.
The leaders of the G-20 were careful not to call any of this an actual agreement or even a promise. These were goals, aims, expectations. (For more on exactly what the G-20 meeting did or didn't achieve, see this post on my website.)
But still, as loose as the timing in these aims is, as vague as these promises turn out to be, as good as the odds are that no country in the group will actually achieve these goals, the agreement does indeed describe a broad economic trajectory that goes like this: High-deficit developed countries will cut government spending over and over during the next five years or so. The cuts aren't likely to be serious enough to end the debt crisis in these economies, so the total package over time will include less government spending, higher taxes, slower economic growth and rising interest rates.
As a fuel for stocks, that's got about as much bang as a wet squib a week after the Fourth of July. But that's the course that countries such as France, Spain, the United Kingdom and maybe even Germany have chosen.
Contrast that with the path that the world's big developing economies are headed down in the years from now to 2013 or 2016, the years in the G-20 news release.
Brazil, India, China and other developing nations don't have huge debts from the financial crisis and subsequent stimulus spending to pay off. For example, Brazil's government deficit is currently running at about 3.24% of GDP. The International Monetary Fund estimates that the ratio of government debt to GDP in developed economies will rise to 110% by 2015 from 91% at the end of 2009. In comparison, in April 2010 Brazil's government debt amounted to just 42% of GDP and is headed down to 30% of GDP by 2014, the Brazilian government estimates.
That's not just the stabilization that the G-20 aimed for as a goal by 2016 in its recent news release -- it's an actual decrease in the burden of government debt on the economy. And the decline in debt and the restrained spending pattern are among the reasons Brazil earned its first-ever investment-grade rating from Standard & Poor's this year.