This time last year I was writing about how the European Sovereign debt crisis was coming to a head and that we were seeing continuing improvement in the US economic picture. I suggested we should avoid European markets until a resolution could be found in Europe, either in the form of an exit of one or more countries or by an unlimited pledge of financial support for needy countries. This turned out to be good advice, as US markets outperformed European markets in the first half of the year but, once the Europeans in essence pledged unlimited support for European banks and it became clear that Greece was not going to be allowed to default, European markets outperformed in the second half of the year.Despite the recent outperformance of European markets, it seems clear that the EU economy is not doing well. Even in Germany, which has been the main pillar of support for Europe, GDP growth is forecast at less than 1% this year. Housing prices continue to fall in places like Spain, and unemployment remains very high, especially youth unemployment.
In contrast, the Unites States seems to be slowly but steadily recovering. House prices are rising, as are home purchases. Retail sales have been good, and unemployment, while still elevated, is gradually coming down. From this perspective it seems that, while European markets may have experienced a good relief rally, long-term investors may be better served by betting on US markets.
About this time last year I also wrote about how emerging markets were, once again, becoming interesting as inflation seemed to have been controlled in many places, most importantly China, and as growth rates had stabilized at more sustainable levels.
Indeed most emerging markets did reasonably well last year with the exception of the local China market. In my opinion, this makes the Chinese market quite attractive at this point.
An interesting topic these days is that of “inshoring” – which is the opposite of the offshoring trend we have seen over the last two or three decades where manufacturing and other low-level jobs have moved from high-cost regions like the United States to low-cost regions like China. Some of these jobs are now moving back as Chinese labor costs have risen at a 20% annual clip for a number of years so, once transportation costs, intellectual property protection, and customer access are considered, the US becomes attractive as a manufacturing center again. Recently we have seen General Electric start building washing machines in the USA again, and Apple has announced a new plant to build certain of its products in the United States. In fact, even Asian companies are building manufacturing facilities in the US these days, as is the world’s largest computer company, Lenovo; a Chinese firm that acquired the IBM computer business some years ago.
This trend benefits not only the US but also two other players: Mexico benefits because of its proximity to the US market and because its labor costs are now more competitive with those of China. Also countries such as Thailand and Vietnam benefit because labor-intensive activities are relocating from China to these countries, whose labor costs are now quite a bit lower than Chinese.
On another note – for the third (or is it fourth) year I am warning about the dangers of buying bonds at today’s very low interest rates. The day when there will be an exodus from fixed income investments is getting closer. If investors become more confident in equity markets as many economies pick up, then this could be the catalyst for a bond sell-off.
Commodity markets were up and down in 2012 as concerns around a general economic slowdown persisted. However, now that it seems growth has stabilized in China and is continuing in the US, I would expect commodity markets to do reasonably well – with the added benefit of a hedge against the Iranian nuclear standoff, which will likely come to a head this year.
Generally I am fairly bullish for equity markets this year, and for the first year in a long time I would recommend growth-oriented holdings rather than value stocks; at least in the USA, certain emerging markets, and commodity-based developed markets.
Tom Zachystal, CFA, CFP
Tom Zachystal is President of Individual Asset Management, a Registered Investment Advisor specializing in investment management and financial planning for expatriates.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
Individual Asset Management is a U.S. Registered Investment Advisor; Tom Zachystal is a Chartered Financial Analyst, and Certified Financial Planner™ professional with over ten years expatriate portfolio management and financial planning experience. He has clients on four continents in over a dozen countries and is one of the original members of the Expat Focus Trusted Partner Network, a small group of financial advisors selected specifically for their professionalism and integrity. His services include: US or offshore investment accounts, IRAs, 401ks, portfolio/investment management, UK SIPPs, retirement planning and other financial planning services for US citizens living abroad or residents of any nationality living in the US.