Since I do a lot of writing and talking about investment opportunities in international markets, some may get the impression that I’m not very interested in the prospects of investing in US stocks. Additionally, most of the exchange-traded funds in Chartwell ETF Advisor portfolios have been international or global since early 2003.
But it seems I have more confidence in America’s future than most. A recent poll by the Chicago Council on Global Affairs indicated that 55% of respondents believe the US will be equaled or surpassed as a world power in the next fifty years. A group of Chinese surveyed believe their country will overtake the United States in terms of global influence within ten years.
My take is that while the world is clearly filling up and emerging competitors like India and China are catching up fast due to rapid advances in technology and communications, the US economy is more than good enough.
And given that the valuation gap between the US and foreign markets has narrowed considerably, I believe that the overall performance of the US stock market and, in particular, certain sectors such as financials, technology and health care, may very well outperform global markets. The US dollar may also surprise bearish pundits. Our ETF portfolios will incrementally adjust accordingly and before long will likely be balanced between the US and international markets. One of my favorite ETFs, the iShares S&P Global 100 (IOO), reflects this balance, giving investors exposure to the world’s 100 largest companies, 50% of which are US.
On what do I base this renewed confidence in the American markets? Let’s start with an overview of America’s current strong position, its competitive advantages, and most importantly, where it’s headed.
The United States accounts for about 23% of the world’s GDP and between 2003 and 2006, the US’s GDP was larger than what China has ever generated in its entire history. California’s GDP is double that of India. Additionally, 693 of the world’s 2,000 largest companies and 83 of the world’s 200 largest companies are headquartered in the United States.
Americans won all the Nobel prizes for science in 2006. 46% of the market capitalization of the 200 largest companies in the world are American. It has the deepest and most liquid capital markets with companies listed on the New York Stock Exchange with a combined value of $15 trillion, three times more than its closest rival, Japan.
The restructuring of the US economy, while painful for 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 zero net new jobs. The United States remains the most dynamic of the large industrialized countries with 75% of today’s Fortune 100 companies not even in existence in 1980. In terms of the ease of starting a new business and the number of business start-ups, no other country is approaches him. The United States remains open for business, all over the world.
Even in manufacturing, the United States remains a powerhouse with a larger global market share than any other country and with output twice that of our closest competitor, Japan. There are also signs that as wages and other costs rise in emerging markets and concerns about quality, intellectual capital protection and logistics grow; offshore manufacturing will soon begin to come home.
And investors will increasingly see the US as a safe haven as uncertainty mounts in the world with continued challenge from radical Islam, a more progressive stance from Russia and China, and cutbacks in defense spending in the United States. Europe.
While the US dollar has lost ground in recent years, the pendulum is likely to swing the other way and its status as the world’s key reserve currency is unlikely to be in question for long.
As I mentioned at the outset, most international stock markets have outperformed the US broad indices since 2003, but the valuation gap has narrowed considerably and the inevitable mean reversion indicates that the tables are beginning to turn.
For all its faults, the US political system is the most transparent and stable in the world and far preferable to multi-party parliamentary systems, as in the case of India, where a small communist party coalition member can stall market reforms. Investors tend to consider economic factors much more than political factors when making decisions, but in many cases, politics is more important. Big bull markets like the ones we are currently seeing in Australia, Ireland, and India started with ambitious market reforms.
Then there is the demographic angle. The United States, largely due to immigration, continues to grow while most of Europe, Japan, and especially Russia are rapidly declining. While most of Asia has a relatively young population, China is an exception that will put enormous pressure on your 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 on how it will renew and reform itself to meet the growing challenge from countries like India and China. Our continued commitment to freedom, openness and flexibility is the key to our continued strength, innovation and leadership.
Instead of being content and complacent, the United States will move to greatly simplify its tax system (a simple tax rate?), relentlessly pursue innovation in education along the lines laid out this week by Bill Gates in his testimony at the US Senate, will use the influence of our huge consumer market to open markets abroad, reform our credit card industry, and cap the growth of federal spending along with entitlement reform. Our foreign policy will also become more pragmatic and avoid extremes of isolationism and adventurism that are not based on the national interest.
I am confident that all of these reforms and more will happen because they have to to keep America on top. Americans will not settle for less.
