The key question for global exchange-traded investors is this: will the current financial turmoil over time work itself out or will it spread to the real economy leading to a global economic slowdown or worse a global recession. If it is the former, I say start building positions in cheap ETFs like the Netherlands (NYSEARCA:EWN) which is trading at an incredible nine times earnings. If it is the latter, best to keep your powder dry.
Global economic growth is still robust with the IMF forecasting global growth of 3.4 per cent for this year. But will this forecast hold up if financial problems eventually impact economic growth as they did following the bursting of the tech bubble in 2000?
The Financial Times points out two ways that financial problems could hurt the real economy. The first is consumption. Across the world, household spending has been supported by both property and equity prices. If the US housing slump deepens and markets continue to be weak, consumption growth will slow. Home Depot's and Wal-Mart’s gloomy outlook plus weak auto sales are worrying trends. In turn, many emerging economies, including China, are still to some degree tied to American and European consumers.
In addition, there is the negative effect of rising borrowing costs on companies’ capital spending and hiring. Global business spending has been supported by record cash flows, as well as by debt-funded investment. While expenditures in these areas may slow gradually as companies adapt to the new environment, there is already some evidence that software and equipment spending is softening in the US. Employment would also be dealt a blow and this, in turn, would hit consumption consumption as the level of employment is closely linked to real disposable income growth.
Watch for signs that highlight what is happening to the real economy: jobs, spending and capital expenditures, and act accordingly to position your ETF portfolio.