Since I do quite a bit of writing and speaking on investment opportunities in international markets, some may get the impression that I am not very keen on prospects for investing in American stocks. But it appears that as we head into the 4th of July weekend, I have more confidence in America’s future than most. A recent poll by the Chicago Council on Global Affairs indicated that 55% of those polled believe that the U.S. will be equaled or surpassed as a global power over the next 50 years. A group of Chinese polled believes their country will catch up to America in terms of global influence within 10 years.
My view is that while the world is clearly filling in, and emerging competitors like India and China are catching up with us quickly due to rapid advancements in technology and communications, the American economy is more than holding its own. And since the valuation gap between the U.S. and foreign markets has narrowed considerably, I believe that the overall performance of the U.S. stock market, and in particular certain sectors such as financial, technology and health care, may very well outpace global markets.
The U.S. dollar may also surprise pessimistic pundits and the U.S. is still the best place to invest in the world. One of my favorite ETFs, the iShares S&P Global 100 (IOO), reflects this balance well providing investors with exposure to the 100 largest companies in the world, of which 50% are American.
On what do I base this renewed confidence in American markets? Let’s start with an overview of America’s strong current position, its competitive advantages and, most importantly, where it is headed.
America accounts for about 23% of world gross domestic product and from 2003 to 2006, U.S. GDP was larger than what China has generated in its entire history. California’s GDP is twice that of India's. Furthermore, 693 of world’s largest 2000 companies and 83 of world’s largest 200 companies are headquartered in America.
Americans win more than a lion's share of Nobel prizes in sciences and the University of Colorado has won four over the last twenty years while Oxford University has won none. 41% of market cap of largest 200 companies in the world are American. It has the deepest, most liquid capital markets with the NYSE listed companies with a combined value of $15 trillion--three times that of its nearest rival, Japan.
The restructuring of the American economy, while painful to many, has produced a very flexible economic platform that, with the right policies, will generate new jobs like the 20 million net new jobs in the last 20 years, while Europe has created a net zero new jobs. America is still the most dynamic of the large industrialized countries with 75% of current Fortune 100 companies not even in existence in 1980. In terms of ease in starting a new business and the number of company start-ups, no other country comes close. America remains open for business--worldwide.
Even in manufacturing, America remains a powerhouse with a larger global market share than any country and with an output twice that of Japan. There are also signs that as wages and other costs rise in emerging markets and concerns about quality, protecting intellectual capital and logistics grow; offshore manufacturing will soon start to come home.
And the U.S. will increasingly be seen as a safe haven by investors as uncertainty in the world increases with the constant challenge of radical Islam, a more forward leaning posture by Russia and China and defense spending cuts in Europe. The U.S. dollar recently regained lost ground and its status as the world’s key reserve currency is unlikely to be challenged for a very long time.
As I mentioned up front, most international equity markets have outperformed broad U.S. indexes since 2003, but the valuation gap has been narrowed considerably and the inevitable reversion to the mean signals that the tables are starting to turn. Remember, great bull markets all begin with ambitious market reforms.
With all its faults, the U.S. political system is the most transparent and stable in the world and much preferable to multi-party parliamentary systems such as in India, where a small Communist party coalition member can stall market reforms. Investors tend to consider economic far more than political factors in making decisions but, in many cases, politics is more important.
Then there is the demographic angle. The U.S., in large part due to immigration, is still growing, while most of Europe, Japan and especially Russia are rapidly declining. While most of Asia has a relatively youthful population, Japan and even China are exceptions, which will put tremendous strain on its budget.
But my greatest faith in America’s golden future is not based on what it has achieved or its current position of strength, but rather in how it will renew and reform itself to meet the growing challenge from countries like India and China. Our ongoing commitment to freedom, openness and flexibility is the key to our continued strength, innovation and leadership.
Above all, we need to keep America a land of ambition and aspiration.
Rather than being content and complacent, America will move to greatly simplify its tax system (one simple tax rate?), relentlessly pursue innovation in education, gain energy independence through expansion of natural gas, nuclear and other clean energy, use the leverage of our huge consumer market to open overseas markets, and put in place a cap on the growth of federal spending coupled with entitlement reform. Our foreign policy will also become more pragmatic and avoid the extremes of isolationism and adventurism, which are not grounded in the national interest. American companies and our political leaders also have to focus on growing with Asian and emerging markets. One good example is Procter & Gamble whose sales to their markets is doubling every four years.
Without question, this can and should be a new American century. Our future lies in our hands rather than in Beijing, Brussels or Brasilia. America’s edge is its indomitable “why not?” attitude as well as its openness and opportunity for second chances. Deep in the DNA of America is the drive to stay “first among equals.”
This means thinking big and understanding the “guts” of America’s strength and resiliency. To move forward, we need to look back to George Washington, Alexander Hamilton and Abraham Lincoln for they left us a blueprint to remain the strongest, the most prosperous and the most independent, respected, and influential nation on earth.