At any one time, investors will get vexed over the frightening tangle of headlines which, of course, are there to be controversial. The point, though, is for us to be able to identify the main issues. I can come down to four key areas that demand our attention and, while others will no doubt appear from the economic tangle, these need our immediate attention.
United States
While the good news is that the US is recovering, at what cost is that coming? Currently for every US$1 of growth in GDP, they spend $8 of investment. At that rate you should expect growth, but it seems a high price to pay. You have to ask whether ultimately this is enough to capture confidence for corporates to start investing again. Much of this will depend on the election and the policies of whomever wins, but either victor will have the Gordian knot of the US debt and deficit to address, problems for which there is no obvious Alexandrian sword to cut through so easily. However, with the assurance that “Americans don’t do austerity”, I can see actions being taken to encourage companies to spend and invest. That, for investors at least, has to be a comforting thought for US equity markets.
Eurozone
The crisis in the eurozone has dominated city pages for months now and with the headlines continuously negative it would be easy to forget that progress has been made. Eventually there will be a reformed euro structure. However, traders must leave that aside and look through to the corporates throughout the eurozone and, come to that, the UK. The next couple of years will see a turn in the cycle as we slowly work our way through and this too will be positive for those leading European markets. In many ways I would ignore the pandering of the petty politicians and look to the construction of creative corporates who will carry on through.
China
China is changing as the export-led model has weakened and domestic consumption attracts greater focus. From social issues to banking and accountancy concerns, the structural issues for China are legion, but this is what you expect with a burgeoning economy. Is China a bubble? No. But it isn’t dissimilar to a bar of Aero in that it has lots of little bubbles. China will continue to grow. Investors don’t have to risk direct involvement in unreliable domestic companies, but can invest in the effect of China and its ripples externally. The brands and consumer story have much further to develop from where they are at the moment. The commodity demand is not going to collapse, but the searing demand may well ease. This will naturally allow a greater focus on the miners themselves rather than the speculative commodities. The currencies will continue the competitive race to the bottom but remember, there is for the moment only one who can print on regardless Uncle Sam.
Geopolitics
Here, our focus is currently on what happens in the Middle East; so what’s new? Second guessing this is a mug’s game and so remember that our only protection to such effects is broad global asset allocation. That said, traders should take heart the global economy is not doomed. It certainly does have its key risks, but these are the very things which can provide key opportunities. Take them.
