Over the past several weeks, analysts have been debating whether the Fed will begin tapering its bond-buying program in September. This comes amid debates of how fast our economy will grow in the second half. It should be clear to most that one is dependent on the other.
As a result, we believe that optimistic GDP forecasts (those that foresee growth exceeding 3.5%) should be viewed with skepticism. While we believe that the Fed would like to see 3.5%+ growth become the norm, extraordinary levels of bond-purchasing needs to be reined in. Thus, we believe that anything over a modicum of natural growth will be offset by Fed's more aggressive tapering.
This should not be viewed as bad news for the economy as a whole. The fact that our economy is forecast to grow at a fast enough rate to justify bond-tapering is clearly positive. Further, shifts in the balance of economic power have been favoring U.S. strength at the expense of foreign nations, most notably China.
This brings up the growing issue of "protectionism". Protectionism is not favorable for the development of an interconnected world. However, at this point in time, it does appear favorable for U.S. This should come as no surprise - as long as America's global economic dominance remains intact, a protectionistic war is not one the USA is likely to lose.
Still, investors need to monitor the battles, because not all U.S. interests will be winners in such a war. Take Cisco (CSCO) as an example. Until recently, the Chinese market represented fertile ground for the networking giant - an area for growth it sorely needs. However, recent displays of protectionism have put Cisco in the line of fire.
In March, a new law made it "illegal for government agencies to buy computer hardware from companies with links to the Chinese government" without special clearance. Corporations are still free to do as they please, but have been urged to follow the government's lead. Not long afterward, the Chinese media made its plea for Chinese entities to make the switch to domestic products.
For a company like CSCO, the cons outweigh the pros.
This is likely true for any company playing in an industry where American exports exceed Chinese imports. Examples that most can relate to include restaurants like Yum! Brands (YUM), movie companies like Dreamworks (DWA), and technology vendors, like CSCO. Of course, protectionism also hurts import/exports. Thus, international transportation companies also stand to be impacted. Examples include UPS (UPS), FedEx (FDX), and DryShips (DRYS).
In each case, investors need to ask themselves "how critical is China to the continued growth of this company." In cases where the answer is "very", the investor should think twice about investing. The impact of protectionism may cost you dearly.