While short term price trends sometime make us nervous with the potential for periodic losses or worse, stock investors are generally always on the lookout for long term growth opportunities. With the current bull market in its 5th year of existence and valuations creeping toward the upper end of historical ranges, we are all starting to work a little harder to find growth without overpaying for it. Here’s where I see it happening over the next 3-5 years.
BRICs
The BRIC group of countries is well known as an acronym representing Brazil, Russia, India and China. In fact there are several ETFs now with roughly equal weighting to these four countries (EEB is the most commonly used). Since 2010 and really back to the final peak in global equities in 2007, these classic developing countries have been under selling pressure as developed markets in the US and Europe surged out to all time new highs. Now the comparison between developed and developing nations may have reversed to favor the BRIC countries. Russia with all of its political risk is holding the group down while the rest are working overtime to carry the group higher. If the mess in the Ukraine subsides even a little, I think Russia will not be a drag. We have already built a reasonable stake in the BRIC countries in our equity holdings across nearly all strategies through individual funds, ETFs or representative stock positions but I can envision us becoming even overweight in the coming months if conditions persist. I like the BRIC countries because they represent some of the best growth opportunities in the world on a longer term basis. Bespoke and several other research firms are now regularly reporting on percent of World Stock Market Capitalization by Country. The US is the still the gorilla weighing in at a healthy 35% of global market share. However, like its closest competitors in the developed world (Japan, the UK, France and Germany), that share is shrinking consistently. Since the end of 2013, we have seen global market share in the developed world fall as follows:
United States -.05%
Japan -.23%
United Kingdom -.33%
France -.24%
Germany -.37%
Now consider the change in BRIC country’s market share:
Brazil +.07%
Russia -.26% (Watch for a big rebound post Ukraine)
India +.43%
China +.26%
Also noteworthy in the “growing country” list is Canada, Australia, Saudi Arabia, Indonesia and Thailand. Remember, we’re talking about some long term macro shifts in contribution to global GDP. These are slow moving trends but pronounced and consistent. As I said, over the next 3-5 years, assuming we don’t go through another global financial market meltdown, we should remain focused on where growth potential exists. Europe is no longer growing and it probably now in recession formally. The US is hanging in there growing/ recovering nicely but I am becoming more concerned that the US financial ecosystem is becoming more fragile again as we face the growing threat of real inflation, tighter credit markets and a less accommodative Federal Reserve (end of QE). Developing market investing is naturally a higher risk but higher potential reward proposition. Don’t forget, we don’t always have to be 100% invested. So one obvious strategy is to cut total exposure in one’s portfolio to equities but carry a heavier weight in these growth markets effectively neutralizing the impact of higher volatility positions on your portfolio risk profile. Any of our clients with accounts in our Tactical Equity Models can simply view a current holdings report of their accounts and see that very strategy in effect now.
Inflation Sectors
Continuing on the theme of growth opportunities, I think we should also keep an eye on the commodities world. Currently, trends in the US dollar are playing some tricks on this group and seem to be a negative but if inflation and global demand for materials, energy and metals continues higher, we SHOULD see the entire commodities complex spark up. Again, the savvy investor will watch technical price trends and invest when they are in our favor. Right now, I’m not seeing much of a trend but I do see a growth opportunity, which is really the point of this discussion.
Technology
Technology has been leading the developed world higher for most of the last two years. This continues today even while our markets have been correcting since early July. Technology, especially some of our largest companies in the world, is now one of the largest contributors to global GDP. Plainly put, technology is responsible for most of the new hiring, wealth accumulation and demand for goods and services in the world with financial service and healthcare trailing not far behind. While we might focus on the state of employment, monetary policy, politics and other noise, we need to respect the raw fact that a “growing” piece of our daily household spending is going toward technology, communications and internet services. This morning, I painfully bought a MacBook Air for my son heading into 7th grade through their education website as a mandatory part of the school supplies list. Furthermore, the developing world is just getting started with their adoption of technology by developed world standards. Growth in technology is real and present – buy any discounts for the foreseeable future.
These are the areas where I see longer term growth. Others may exist on short term windows but they may be only good for a trade. Stay focused and stick with the big themes and you’ll find the work of investing becomes much easier and productive.
Have a great last week of summer – oh my!
Sam Jones
