Well no it isn't.Much has been made in the last few years about the idea of decoupling. A few years ago investing in certain foreign countries was believed to be a way to beat bear markets. Then when the market started to turn down and correlations went up the folks banking on decoupling were sorely disappointed.
Now it is a few months later and the Wall Street Journal ran an article yesterday titled Finally, Global Markets Are Going There Own Ways.
This ties in with a lot of the stuff I 've written lately over at greenfaucet. From the beginning of this site I have tried to convey the same message about how to diversify with foreign exposure and what expectations to have about that foreign exposure.
In selecting foreign exposure I believe the most value is added by buying countries with different economic attributes than the US. Different economic attributes means that those countries are very possibly on different economic cycles and so could be on different stock market cycles. These types of countries provide the best shot that an investor has for a volatility reducing zig zag effect within the portfolio.
That does not mean that some market should be expected to go up 20% when the US goes down 20% but it can mean that some countries rollover into a bear later than the US, emerge out of a bear sooner or both. For months at greenfaucet I have been harping on countries that I think fit this bill (these places will be familiar to long time readers) and generally speaking they did start their bear later and appear to be emerging sooner as well; specifically Chile, Norway, Brazil and China fitting the bill one way or the other.
And while Australia has not done as well as these others I do have long term faith in that country as well. New Zealand is a bit of a dilemma in this regard and I do not have across the board exposure there. Many folks fancy NZ to emerge sooner and clearly their economy is different than the US but there is a lot of debt and it is unlikely that the current account will ever be a positive.
The flip side is investing primarily in Western Europe like UK, France, Germany, Spain or Italy. At different times any of them could of course be great holds but they are much less likely to zig when the US zags like the types of countries I mentioned above. This point makes a great case for avoiding the iShares MSCI EAFE ETF (EFA). The correlation between EFA and and the S&P 500 has always been very high.
10 comments:
Roger,
In the past, you've mentioned a lack of an index investment tool for Norway, has anything shown up yet on your radar in particular for this nation? Also, at one point I thought you held Singapore's economy in high regards. Is this still true? And would you consider this country on par with China, Norway, Brazil, etc.? Thank you.
I do think Singapore has some long term appeal but it is not a commodity country, and the growth story is not, IMO, as powerful as China. As I think I will have more foreign exposure in the new decade I would expect to add singapore but do not yet know how i will add it.
Roger, in regards to the zig-zag dynamics of US and EU markets -
What about currencies?
There's much talk about a soon-to-be weaker dollar, mightn't having some EU exposure help ?
where would you get more benefit; a region that might be less weak or somewhere that might actually be strong?
In my own work the rally in international assets appears to be essentially an echo of the rally in US assets and both have strong bear market characteristics: I see no areas of growing strength, only areas where the rate of economic contraction is less and/or areas where monetary pumping is inflating asset prices. I have made no significant changes in strategic mix since the Fall lows other than a somewhat larger percentage in a real estate limited partnership. Most of my alpha continues to come from the tactical trading portfolio (loving this rally) although I did get stopped out of a couple positions in the last retrace.
On the issue of process however a rally like this can be highly useful strategically. For example I did decide to establish a strategic position in the US auto maker Ford last year (I posted on a couple of my reasons here I think) and, since it has quadrupled in price in this rally, have sold off a portion to bring my effective cost-basis to zero. As a basic principle it is "a good thing" (pardon the Martha Stewardism) to play with house money whenever you can. In this case even more so because I anticipate Ford being crushed along with a lot of other stuff if the monetary pump priming going on proves insufficient to turning the employment picture around: People need money to pay for cars (and a lot of other things) and most of those people need to work for a living.
Shorter version, worldwide, if people are losing their jobs and have either run out of leverage or no longer wish to use it then all the cash in the world will not raise the level of the economic sea.
Hey Roger--I agree with your thesis and have actually taken positions in some of the countries that you have called to our attention.
For sake of discussion, though, I might argue that the US led the world into this mess and, as the largest global economy, will/must lead the world out of it. China can't get its factories humming and its exports going until the US consumer spends again. Oil demand won't really be strong until US manufacturing ramps back up. The US$ is the "least bad" currency and US treasuries are still the safest haven on the planet. None of that is wholly true, of course, but you get the idea.
Don't I recall Buffett saying not that long ago that his whole portfolio would soon be invested in the US? I wouldn't go that far (I'm smarter than he is), but wouldn't it make sense to over-weight the US, at least until there's more certainty about a global recovery?
Thanks much for your thoughts.
when the next expansion begins it will benefit economically up stream countries first so those are the places I am talking about in this post. also there are countries that are simply much healthier.
as far as China, I hear you on the exporters which is why i hav mentioned repeatedly not wanting that part of China. The stock i own for china and the ones i am considering participate in the story on the ground as opposed to how much they can sell to other countries.
Roger, FWIW, IMO, I believe the 200DMA area will be a good spot to short. Maybe that’s why it won’t happen, BUT…. everyone seems to still be in disbelief (and even anger) about this rally. The rally is just a rally. Believe it. Until people really believe it, or the shorts stop trying to catch the top, we will float higher. I say float, because it is lack of sellers (true sellers) rather than actual rushing in of buyers. The only rush of buyers is daily short covering.
Maybe 875-880 will cause a rollover to the downside, but the sentiment here says no. Too many are looking for the pullback. Too many are looking for the resumption of the bear. Too many are trying to make money shorting (including inverse ETFs). Until this changes, bias is up. Likely we get a false break above the 200 day moving average, a pullback, and a retest of the top. It could take many months before the next real down leg starts. So be careful of placing your SDS position on too soon.
China is stall a communist country. Seems like political risk should be a part of the discussion. Oddly enough, a few weeks ago when scanning the WSJ's international stock indexes, Venezuela was the only one in positive territory. Today it is second behind China. Maybe nationalization will be good to the stock market after all. eh comrad?
Roger,
Could you elaborate a bit on your opinion re Australia?
From my perspective Down Under, it seems we have a lot of problems, but that a recovery in commodities prices will tide us through. Also, what is your opinion on the Aussie dollar?
Thanks
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