How US Investors Can Cope With Our Federal Failure Factory: Good point from Mark Mobius of Franklin/Templeton: US political dysfunction need not be unalloyed bad news for investors. For example, investors in emerging markets, could be advantaged by a US political process that has become a failure factory. I also think these continued issues in the US could likely change investment allocations around the world, with less emphasis on holding US dollars and more diversification into other currencies as well as other assets. Global trade could change, with more trade being settled in other currencies such as the euro and RMB. In addition, precious metals and other rare collectables could rise in USD value. From my point of view, the problems the US is now facing with its budget and the discussion of the (very unlikely) possibility of the default could be an inadvertent positive for some emerging market countries over the long term because outflows from US Treasuries could go into other markets. It could incentivize investors who are heavily invested in US debt and the US market generally to have second thoughts about putting too many of their eggs in an uncertain US basket and lead them to diversify their investments more globally. Such a portfolio could include greater allocations to emerging markets. The US has a high debt-to-GDP ratio1, slow growth and limited foreign reserves. In contrast, relative to the US, emerging markets generally have much lower debt to GDP ratios, more foreign exchange reserves and much higher GDP growth rates. When incorporating the entire universe of emerging market stocks and not just index representations, emerging markets now represent 35% of the world’s market capitalization2. As the late Sir John Templeton once said, “to avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify.” Money has to flow somewhere and if political risk factors drive money out of US markets, then that money gets pushed somewhere. One of the most likely destinations of capital fleeing from a stagnant and perhaps inflation US would be the emerging world. But its not the emerging world in general. Its the most free parts of the emerging world which are the most likely beneficiaries. A highly capitalistic Hong Kong is an extremely different case than a socialist sinkhole like Venezuela, even if the financial industry crams them both into the same category (and even the same securities) of emerging markets.
Posted on: Sat, 19 Oct 2013 18:07:32 +0000
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