Are the markets inside out?
Everyone says that Asia is the world’s new growth engine and that the US economy will be sluggish for years. So why are Asian markets struggling while our stock market seems to be buoyant? Isn’t China the world’s biggest creditor?
Yes, China has built it’s economy on exports and so it has amassed massive foreign exchange reserves. And yes, the further emergence of hundreds of millions of Chinese and Indian peasants will help the global economy. But it doesn’t follow that these markets are automatically good investments.
To have a basis for international investing, a country needs a well-articulated legal structure, a stable political system, a solid financial infrastructure, and a sound currency. All of these elements are necessary for successful foreign investing, and many developing nations have just begun to create these institutions, for all their improvement over the last decade.
But while these conditions are necessary, they aren’t sufficient. The timing also has to be right. At present many Asian economies are close to overheating, even while Western nations struggle with overcapacity. So their interest rates are rising, while ours are at the "zero bound." And rising rates reduce the present value of all financial assets, stocks included.
As a result, one of the first rules of investing is, "Don’t fight the Fed." With Asian central banks keen to take away the punch bowl, their stock markets could be in for a bumpy ride.
Douglas R. Tengdin, CFA
Chief Investment Officer
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