New Leadership Set To Surge
Viewing these trends more globally, where to next? Volatility spiked in the first six weeks of 2016 as renewed global recession fears surfaced. Now visibility is increasing. Importantly, a U.S. and wider-world recession looks highly unlikely this year, as I wrote about it February.
Emerging from this volatility is more discrimination. Correlations are rapidly declining. And new leadership is underway. A likely candidate to provide the lead is commodity-importing Asian countries—nations like India and Vietnam, which can be accessed via the iShares MSCI India ETF (INDA | C-97) and the Market Vectors Vietnam ETF (VNM | C-32).
Chart courtesy StockCharts.com
In addition to the benefit from lower oil prices, three other key macro positives exist within the Asian region.
First, China’s policy fog is finally lifting. Its global image—assiduously promoted by the world’s ubiquitous bears—is of a failing economy beset by a collapsing currency; panicked capital flight by investors; and a banking sector teetering on the brink of disaster.
Blinded By Blind Faith
That narrative may sell newspapers. But what sustains and supports that story is, among other things, an almost blind faith. “China must crash” has become not so much a well-researched assertion as a theological one. How could a command-style economy ever create lasting value? A fair question, but the answer—of course—is complex.
The more important development is that China is not crashing (with a foreign trade surplus of $63 billion in January alone and soaring household income—rising 9% last year), and better policy communication is emerging. This type of progress is crucial to attract flows to other Asian countries that have been indiscriminately sold off on China-driven fears.
Secondly, trends in the U.S. trade deficit. Importantly, the U.S.’ ex-energy, ex-China trade balance shifted from a surplus to a deficit in 2015, sending $150 billion to the world. Historically, a widening of the deficit has always provided a boost to global growth via an upturn in trade and liquidity. Emerging markets—which tend to be net exporters and do much of their financing in U.S. dollars—stand to benefit the most.
Finally, a strong U.S. dollar head wind looks to be abating (see my December blog, “Here’s Why The US Dollar Is Peaking”).
The chronically rising dollar has been a destabilizing force globally, as concerns about U.S. competitiveness and EM solvency have steadily increased. A change in regime would most benefit EM corporates, with high levels of financing denominated in U.S. dollars (which peaked last year at $6 trillion).
Director Inarritu’s film is a haunting piece of cinema. Several unnerving, gaze-averting scenes litter the script. “But there is no gratuitous violence,” the director says. Perhaps. Global investors, on the other hand, have definitely endured an unwelcome, volatile script in 2016.
However, this always occurs when a significant transition is happening.
Looking ahead, investors should stay focused on longer-running macro themes. China is critical here. Its labor force grew by 200 million people in the 10 years spanning 2002 through 2011, and average annual GDP growth was 10% during that period. That era is now over. Unsurprisingly, investments that did well during China’s rapid industrialization years are faltering.
Now, the environment is changing—Leo finally got his Oscar and commodity-importing Asia looks set to lead.
Tyler Mordy, president and chief investment officer of Forstrong Global, is a recognized innovator in the design and application of global macro ETF managed portfolios. He is widely interviewed by the financial media for his global investment strategy views, as well as ETF trends. CNBC has called him one of the “best independent ETF experts.”