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. In addition, the majority of the exchange-traded funds in our portfolios have been international or global since early 2003.
But it appears that 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 fifty years. A group of Chinese polled believe their country will catch up to America in terms of global influence within ten 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 healthcare, may very well outpace global markets. The U.S. dollar may also surprise pessimistic pundits. Our ETF portfolios will be adjusted accordingly on an incremental basis and before long will likely have a balance between U.S. and international markets. One of my favorite ETFs, the iShares S&P Global 100 (NYSEARCA:IOO) reflects this balance well providing investors with exposure to the 100 largest companies in the world of which 50% are American.
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 GDP and from 2003-2006, U.S. GDP was larger than what China has generated in its entire history. California’s GDP is twice that of India. Furthermore, 693 of world’s largest 2000 companies and 83 of world’s largest 200 companies are headquartered in America.
Americans won all Nobel prizes in sciences in 2006. 46% 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 has generated 30 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 inexistence 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 our nearest competitor, 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.
While the U.S. dollar has lost ground over the last several years, the pendulum is likely to swing the other way 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.
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 the case 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. Great bull markets such as we are currently seeing in Australia, Ireland and India all began with ambitious market reforms.
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, China is an exception 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.
Rather than being content and complacent, America will move to greatly simplify its tax system (one simple tax rate?), relentlessly pursue innovation in education along the lines laid out this week by Bill Gates in his U.S. Senate testimony, use the leverage of our huge consumer market to open overseas markets, reform our credit card industry, 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.
I am confident that all of these reforms and more will be accomplished because they have to be in order to keep America on top. Americans won’t settle for less.