Wall Street has become nervous lately about Europe’s public debt problems. These worries are reflected in the recent correction in stock prices, which was not completely unexpected.
Unfortunately, the fear is that what Europe is facing now at some point we could be facing the same thing here in the U.S. Historically, government bonds are considered the safest investment vehicles since they are guaranteed to be repaid (principal and interest). This guarantee is backed by each government’s ability to raise taxes to cover their obligations. However, if a government’s debt becomes too large, the fear is that the government cannot raise taxes enough to repay their debt without creating great financial hardship for their citizens and businesses. Low economic growth is one concern, but depression-like conditions and a lower standard of living are quite another.
Some investment professionals are beginning to tout that the bonds issued by large publicly traded companies (i.e., corporate bonds) could be a better investment than government bonds. The following chart illustrates that the amount of cash that large U.S. corporations have on their balance sheets is at its highest level in 30 years. This is the result of many companies reducing costs (i.e., tightening their belts), becoming more efficient and taking a much more prudent approach with their finances.
Many corporations are taking steps to improve their financial future, while governments around the world are struggling to pay their bills. It is a legitimate concern that governments may have to raise taxes to such a level that corporations, let alone individuals, will have to pull in their horns when it comes to spending either to maintain their market share / lifestyle or expand it. Currently, businesses of all sizes and individuals are still holding onto a fair amount of cash until they know the landscape. In the short term, this does not help prop up the bond or stock markets, let alone bring on new hires. However, this prudent approach may be a good step until we know the financial terrain ahead.
Even though stocks around the globe have had a large run up from their lows last spring, the following chart illustrates that they are not overvalued when compared to global GDP (gross domestic product) on a historical basis. Any correction will only bring more bargains to the forefront for professional and institutional fund managers.
Even though the global economies around the world rely heavily on U.S. consumers to buy / consume their products, it is becoming increasingly evident that emerging markets are beginning to take over that role. The following chart shows that emerging markets now have a larger share of global consumption than the U.S. If this trend continues, then countries like China, Brazil, India, Poland, Singapore, Thailand, Philippines, etc. will become a greater consumer of goods and services. Over time, this increased buying power will help reduce the U.S. trade deficit and result in greater sales, profits and employment opportunities for U.S. corporations. Large multinational corporations in the EU and Japan and other developed countries will benefit as well.
I am not saying the emerging markets can cure what ails the EU or the U.S. and completely wipe out their respective government deficits. However, this trend can be one part of the solution.
Fund managers aren’t sitting idly by
I have read several publications from various fund managers regarding the tactical strategies they are implementing in light of a potentially higher interest / inflationary environment. Without going into intricate detail, some funds are doing the following:
- avoiding specific countries due to economic concerns,
- hedging a portion of the holdings against currency declines
- reallocating their fixed income / bond portfolios to take advantage of higher interest rates
- investing in gold or precious metals
- focusing on a companies that have the ability to increase their dividends
Remember, fund managers are like hockey players. They don’t play to where the puck currently is, but where it is going. Some investment strategies being implemented now may actual cause the portfolio to decline in the short-term, and it could be several years to see the full fruits of their efforts.
Quotes
“A man with ambition can do more with a rusty screwdriver than a loafer with a shop full of tools.”
German proverb
“Life is an attitude. Have a good one.”
Eric L. Lungaard, author
“Worry doesn’t help tomorrow’s troubles, but it does ruin today’s happiness.”
Author unknown
“Setting a good example for your children takes all the fun out of middle age.”
William Feather, writer
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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