Shifting Growth Dynamics

Previously, I blogged about the rationale behind surging global stock prices, when in fact the main engine of global growth, the U.S. economy, appears to be faltering. The question is: Why has the DJIA surged to record highs above 13,000 for the first time - with U.S. GDP slowing in Q1 to the lowest levels in four years?

Do you know that most other global markets & economies are performing much better than the U.S. In fact, so far this year the DJIA is only up a bit over 5%. But the Dow Jones World Index (excluding U.S. stocks) has gained nearly10%, & Chinese mainland shares (still one of the hottest markets going) are up about 40%!

But there's another key factor behind the strength in U.S. stocks. Among the best performers in the DJIA recently have been big, multi-national firms. All of these giants generate a significant amount of revenue & profits from overseas markets. The sliding U.S. dollar helps boost the international sales & profits of these firms. In addition, these companies also benefit from stronger organic growth in foreign markets as well. This is one very good reason why I expect large-cap U.S. growth stocks to perform well this year. But for global investors, much better returns can perhaps be earned by venturing into other markets.

International stocks are again leading the pack this year because both economic & earnings growth rates are much stronger overseas. In other words, international markets appear to be successfully decoupling from the United States. It would seem that the global economy depends less on U.S. consumer spending than many people think. According to data from Morgan Stanley, exports to the U.S. "account for only about 2.9% of Japan's GDP, compared with 4% in previous decades."

For the European Union, which seems to be in the midst of a sustained uptrend in growth, exports to the U.S. amount to just 2.4% of GDP. Emerging nations too, are increasingly selling commodities & other goods to China & India, lessening their historical dependence on the U.S. export market. Many nations throughout Asia & Latin America, even in Europe, are seeing an increase in demand for raw materials from China. Countries like Brazil, Chile, Russia, Singapore, Taiwan, Malaysia, Indonesia, even Japan are benefiting from both growing trade with China, & increased wealth creation internally.

Nations with relatively open & efficient financial markets, with stable currencies, low or falling debt, stable (or better yet declining) interest rates & trade surpluses (unlike the U.S.), are among those that look particularly attractive going forward. So once you decide to invest elsewhere, it's a matter of choosing the countries with the most attractive stock market valuations on a relative basis. This list includes several of those countries mentioned above.

Bottom line: these shifting growth dynamics should help protect many international economies from a sharp slowdown in U.S. demand, as global trade marches on. Of course, you must be prepared for bumps in the road along the way. Global stocks - especially the emerging markets - have been on a tear in recent years, so a meaningful correction sometime soon would not be all that surprising. IMHO, you should view such a pullback in share prices as a great buying opportunity - to get even further invested overseas - as opposed to increasing exposure to U.S. markets.

And don't say I never say hor, for I said here already.