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Given all that has transpired in the world during the first two months of 2011, it is no wonder that investment markets have been incredibly mixed.
In many US states, Republican governors and public unions have been in deep battle over benefit reductions and collective bargaining agreements.
In Washington, budget battles have ensued almost daily, with the potential threat of a government shutdown in March.
Internationally, we may be witnessing the Middle East’s own Berlin Wall moment, albeit in a more militant and bloody manner.
- Tunisia’s government was first toppled.
- Shortly thereafter, the autocratic government in Egypt was forced out.
- Now, we are watching the potential fall of Qaddafi in Libya.
Rising Oil Prices
Recent events have resulted in a $10-20 price increase per barrel of oil, and a short-but-sharp pullback in global equity markets.
However, we believe market risks are limited given the small proportion (2 – 4%) of the world’s oil supplies affected, and that cyclical economic indicators continue to strengthen.
Chart I – Top 10 Net Oil Exporters
A major market risk would develop if civil unrest spread to Saudi Arabia, the world’s largest net oil exporter (See Chart I above).
We are keeping a close eye on events, and may move to protect portfolios if deemed necessary.
However, these types of events can also present themselves as short-term buying opportunities, followed by longer-term gains…where buying more into the short-term turbulence can prove superior to selling assets for “protection.”
A “Twinkie” Recovery?
Throughout these major events, US equities have been the strongest performers, with companies posting strong profits, and the Federal Reserve continuing its easing program.
The Fed is buying $8-12 billion of treasuries from major banks each day, cajoling banks to deploy the cash rather than letting it sit idle earning a paltry return.
This money often finds its way into a rising stock market. Some term it the “twinkie” recovery because of its artificial ingredients. Jokes aside, the US economy is improving and companies are growing again.
Emerging Markets Are Undervalued
Emerging markets are continuing to grow rapidly, as large swaths of people move from the countryside to urban settings, undergoing their version of an industrial revolution.
The media often reports on “us versus them” issues, such as our trade deficits with China and how they are “taking our jobs.”
What is rarely reported is how the spread of global prosperity is improving the lives of the poor (see Chart II below).
Also check out a more in depth and entertaining 15 minute TED video by Hans Rosling (gets interesting around minute 9).
Rapid growth, however, comes in fits and starts.
Central banks in many developing countries have recently taken monetary tightening actions to cool off their economies, causing a short-term pullback in emerging markets.
Over time, these stronger economies will likely outperform more developed economies like the US due to higher growth potential and relative undervaluation.
Until then, it is difficult to determine exactly when this short-term downtrend will abate.
Our view is that these pullbacks represent strong buying opportunities for long-term investors, despite having to tolerate some short-term under-performance.