In 2000 technology firms were over-capitalized. They had too much investment capital to put to work profitably. During the ensuing recession consumers kept spending. The result was that by 2007 consumers were over-leveraged. They were over-housed, over-borrowed, and under-productive. During the pullback governments kept borrowing, but now we see a political push to curb government spending.
So over-levered governments will now begin, if not to save, then at least to reign in their spending. If consumers pull back and governments pull back, who will pick up the slack? The principle candidate is business. Interest rates are at record low levels and business profitability is high. So the natural thing for them to do is for them to invest judiciously. Nature abhors a vacuum and something will step in.
Where will they invest? Where the growth is! The emerging markets of Asia and Latin America. Consumer spending is in decline (or at best stable) in the US and Europe; economic growth is very strong in Asia and South America, driven by development and demographics. Those trends aren’t going to reverse any time soon.
So one way for individuals to invest for growth is to seek out in world class companies that are participating in this trend. The stocks of those companies will fluctuate with the market, but their underlying strength will overcome short-term cyclical pressures.
At least, that’s one way to approach it.
Douglas R. Tengdin, CFA
Chief Investment Officer
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