East,
West....
In last week's
commentary I referenced the question I am most often asked this year in the
wake of a tumultuous and turbulent 2018, "what
do we do from here?" The answer to that question is equally as whimsical
to pin down, but not altogether undiscoverable.
Quite simply, look elsewhere.
Global growth is
accelerating in certain regions despite anecdotal evidence that there are
tensions and slowdowns in specific areas.
In fact, the reversion to the mean in most economic data that took place
towards the end of last year helped recalibrate a number of stock exchanges
(and market sectors) which had become extended.
Thus, any predictions downward in GDP are already baked into the
equation such that huge discounts in some equity prices now represent potential
upside opportunity. Indeed, the burden
of unrealistically high expectations has been tempered somewhat.
Most significant to
answering the mercurial question above is to remember where we are in the
economic cycle post recession (2008) and to understand that any decade is
always prologue to the next one. While
the US economy is unquestionably the engine of the global marketplace, there
are opportunities which abound if one widens the aperture of perception to look
for them.
Divergence, region, and
capitalization are not impediments to expansion.
They are reasons for it. In
fact, middle tier and emerging market nations will take their place in the
hierarchy of capital gains potential and expand faster than the West if
exogenous political and territorial
encumbrances can be eliminated. Bear in
mind, there are no absolutes, nor is there any reprieve from short term
volatility or setbacks when investing.
But if you are asking "what's
next?" this coming decade and
beyond might be an era of international potential, concomitant with the steady
leadership of the mature bourses. It is
always necessary to have a long term horizon when playing in the global realm.
Based on my analysis,
my belief is that the significant discount at which the international markets
are trading (versus the S&P, for example) means that they might have a
greater potential in the long term to outperform expectations. We know that central banks have created a
decade (previous) of quantitative easing...low interest rates....which means
that all stocks experienced a steady upswing irrespective of prudent corporate
governance or not. There simply was no
other alternative at that time to stocks in the absence of high bond yields, so
investors benefited irrespective of regional differences. Additionally, the US dollar, by design or
default, rose so much that it muted prospective gains in foreign currencies and
stock markets. The advent of accommodative
monetary policy worldwide both leveled
and lowered the potential for
divergences, and opportunities, to manifest.
That no longer is the case in my judgment.
up,
down....
The curious
"benefit" of a quantitative approach to investing is that the more a
phenomenon becomes devalued the greater its statistical potential for upside
reversal....given the right conditions.
Remember, you can only fill a vessel to 100% of probability or lower it
to zero percent risk, no lower and no higher for either. Thus, well run international companies which
have been devalued in the last decade by exogenous circumstances might in the
near future have earnings expansion potential that belies their currently
depressed share price. Once again, these
global turnarounds do not happen overnight, but rather over years...and
definitely not in a linear pattern. It
is possible that up to 30 percent of our allocations in the next half-decade
could center around global and emerging market shares.
Most often, one's fear
of the unknown works against him in finding the next solar cell company, or
biopharmaceutical leader, or technology innovator. However, I believe that evolution in global
central banks' monetary policies will create more and unique regional potential
and an appreciation of which companies could emerge from the emotional and
financial carnage of the last decade's recession transition economic policies.
As I have written
previously, our investment focus in this realm is and has been water filtration, processing, and delivery: renewable energy sources; harvesting and
cultivating arable land for greater food capacity; biotech and healthcare
advances; technology and software development; and infrastructure expansion,
including rail, air, and trucking services.
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