Amid the many currents and cross-currents that currently swirl through the economic news, I am looking at two major trends in determining how to shape my strategy -- continued growth among the Asian and other developing world economies and the impact on sentiment and credit of the deflation of the US housing bubble (and the derivatives it encouraged). Not only do these two major currents run somewhat counter to each other, they are each also accompanied by their own parallel and counter-trends...
A major bullish factor for the global economy is that the Asian economies, most notably China and India, continue to grow at a remarkable pace. Through the second quarter of 2007, the Chinese economy grew at an 11.9% annual rate. For the same time period, India grew at an also impressive rate of 9.3%. Many other Asian economies grew at annual rates of 5% or better. This has a major impact on global growth that should continue, regardless of short-term market gyrations, for a significant time as this region modernizes. The impact of this growth reaches across all sectors -- from raw materials and energy to industrials and consumer staples.
This region, along with other developing economies, will thus continue to serve as an engine for global growth even as the US economy slows. According to sources for the Wall Street Journal, the IMF will forecast that the world economy will grow at 4.8% in 2008. Though this is a little less than the 5.2% predicted during this past summer, it still represents a rate well above that expected for the US or the Euro area.
A not-so-minor trend running in parallel to this theme is the upward pressure caused by new demand (much of it from Asia, of course!) for raw materials and energy, as well as the transportation assets to move both these goods and finished products. Though these sectors will doubtless have ups and downs as sentiment swings in response to the latest news story, I believe the secular trend for commodities (and their associated equities) will remain bullish.
The negative cross-current to this story is that the Chinese market has reached bubble proportions -- some, in fact, argue that this happened quite some time ago! Last week, according to Bloomberg, the estimated 2007 P/E for the Shanghai Composite reached 45.97, compared to 16.63 for the S&P 500 and 11.70 for the FTSE 100. There have already been a few scares, but with few outlets for Mainland Chinese money, it appears that it will continue to flow into the Shanghai (and soon Hong Kong) markets. Nonetheless, this level of valuation makes me very cautious about the Chinese market.
Of course, we could go into much greater depth concerning each of these trends -- though this discussion merely scratches the surface, it hopefully provides some insight into the themes affecting my investment strategy. As our discussion continues, I will provide more specifics when addressing the logic behind particular transactions.
In my next entry, I will discuss what I perceive as the second major theme in the current market -- the deflation of the US housing bubble and its impact on consumer spending and the credit markets.