Thursday, July 11, 2013

Changes in Global Economy Still Make This the Safest Place to Invest for Now

By Sasha Cekerevac

Since the beginning of the Great Recession, we’ve all been waiting for economic growth in the global economy to begin expanding once again. While it has yet to materialize, not all economies are performing at the same rate, and there are ways to maximize your investments.

Recently, the International Monetary Fund (IMF) reduced its forecast for the level of economic growth for the global economy. The IMF now projects economic growth for the global economy of 3.1% in 2013 and 3.8% in 2014. (Source: “Emerging Market Slowdown Adds to Global Economic Pains,” International Monetary Fund web site, July 9, 2013.)

As I’ve stated in these pages many times, the eurozone remains a significant problem in the global economy, as does a slowing level of economic growth in China. Both of these economic regions represent a huge portion of the global economy, and the inability for either one to reaccelerate its economic growth level is worrisome.

And the slowing economic growth problem is being compounded by increasing interest rates. One interesting twist regarding the higher interest rates in the U.S. over the past few weeks has been that they have now become attractive to international investors. The result is that investors are now selling emerging market bonds and buying U.S. bonds.

That has led to some nations experiencing higher yields, causing problems with their financing costs. Over the past week, we’ve seen yields rise in many nations, including Portugal and Spain.

With many parts of the global economy struggling to grow, having higher interest rates certainly isn’t a recipe for an increase in economic growth.

While the U.S. isn’t generating exceptionally high levels of economic growth, relatively speaking, it is in a better position than most other players in the global economy.

The biggest drag on U.S. economic growth levels has been the federal budget cuts. For example, while the first-quarter gross domestic product (GDP) in the U.S. showed economic growth at 1.8%, it has been brought down by a net decrease of almost one percent from the federal sector. That means that the private sector actually experienced economic growth of approximately 2.7%.

For international investors, that makes the U.S. more attractive than many other parts of the global economy, especially the eurozone. With higher interest rates, investors are now examining the relative risks between emerging market bonds, as well as some developed nations within the eurozone, compared to the U.S.

So what does this mean for your investments?

I think it’s quite clear that the U.S. potential for economic growth is better than other developed parts of the global economy like the eurozone. With China slowing down, that also puts into doubt what that country’s economic growth rate will be going forward.

I think on a relative basis, focusing on U.S.-centric companies could be an appropriate strategy. If a company has a very large exposure to the eurozone as compared to the U.S., I think there could be two potential downsides: 1) the eurozone continues to underperform in terms of economic growth, leading to lower levels of revenue growth; and 2) the U.S. dollar continues to strengthen, leading to currency losses on any repatriated profits.

For the time being, with the global economy not showing signs of economic growth re-acceleration, I would look at companies that cater primarily to the U.S. market. While the U.S. isn’t experiencing the type of economic growth rate we all want to see, compared to many other parts of the global economy, it is in a better position.

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