I remember when I first began to think that U.S. economic dominance was waning. I lived in Taiwan at the time, and things in Asia were moving with surprising speed.
First came the '87 crash, which had me questioning U.S. stock market stability. Thereafter, the S&L banking crisis solidified my fears that the "#1 economy" was falling apart. (Note: Ross Perot was amusingly persuasive with those charts too!)
The end wasn't near, however. The U.S. shrugged off the '91 recession. Consumers began spending freely on their credit cards again. Meanwhile, state and federal governments didn't see a need to spend less either.
I was wrong about U.S. economic rule. Or at the very least, as financial folks like to say... I was "early."
In the mid-80s, I expected that China would be the next economic powerhouse by the mid-90s. As it turns out, China did not vault to the top spot in the mid-90s or even after the dot.com collapse in early '00.
But right now? Post-2008 financial catastrophe? With GM and Chrysler declaring bankruptcy in '09, and the entire "bank concept" still in the process of revision?
Several weeks ago, I acknowledged that if push came to shove, I'd choose a China ETF over a U.S. ETF. A few days later, I explained why I believe emerging markets may be safer than developed markets. Quite a few readers sent me e-messages with nods of agreement.
It's not that the iShares Emerging Markets Fund (NYSEARCA:EEM) isn't "overbought." It is. Yet a high growth investment like EEM isn't going to retest 2008 lows. After all, emerging markets set "higher lows" in March of 2009, unlike developed world ETFs like the iShares S&P Global 100 (NYSEARCA:IOO); the latter set "lower lows" in March of 2009.
Now there's more evidence regarding risk and reward. For example, over the last 4 weeks through the end of May, the iShares Emerging Market Fund (EEM) picked up 16%. The S&P 500 SPDR Trust (NYSEARCA:SPY) picked up 2.4%. Yet EEM was only 1 1/2x as volatile with respect to beta.
Assume for a moment that the volatility has been roughly the same for the first 5 months. I am sure it's pretty close. What you get for 1.5x risk with EEM is 33% YTD versus <2% for SPY.
If safety resides with the countries that stand the best chance of thriving post-recession... if we are counting on "green shoots"... it's China that has the manufacturing pick-up on direct spending on infrastructure. Again, 75% of China stimulus is going to infrastructure, whereas 5% in U.S. stimulus spending is going to "rebuilding America." You should consider the China 25 Index (NYSEARCA:FXI) during pullbacks.
Similarly, it's Brazil's middle class that is spending more freely; Americans are saving more... a good thing, but coming at the expense of consumption. You should consider Market Vectors Brazil Small Cap (NYSEARCA:BRF) to capitalize on Brazilian consumer spending.
The U.S. economy is better off than it was 6 months ago. And it'll be better off 6 months from now. Yet we already need to consider how massive debt and higher inflation may contribute to an exceptionally slow-growing, stagnant environment. Some feel we may even face the dreaded double-dip recession.
To the extent that you need "beta" in your portfolio, you'll still have developed market exposure. Alpha seekers, on the other hand, are already reevaluating the meaning of playing it safe.
Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.