Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Soybeans
- Soybean Meal
- Rice
- New Zealand Dollar
- Japanese Equities
Last week’s reversing trends:
- Iron Ore
- Japanese Government Bonds
- US Government bonds
- Russell 2000 Index
What we are taking note of:
A recent Twitter poll asked followers a simple question: What percentage of the world’s GDP is represented by the emerging markets? It is an excellent question and I suggest you try to answer it before reading further. Take your best guess, then scroll down.
Most people guessed that the answer would be somewhere between 20% and 40%. The correct answer? 58%. According to the IMF, emerging markets economies became bigger than developed economies in 2008, and they have been pulling ahead ever since. Within the next three years, emerging markets’ share should pass 60%.
By itself, the United States represented 40% of global GDP immediately after World War 2 when large parts of the world were laid to waste by the fighting. It maintained a share above 35% all the way until the end of the Bretton Woods system in 1971. Since then, its share slid to 20% at market exchange rates or closer to 15% at purchasing power parity (PPP) which corrects for exchange rate distortions.
This development should be celebrated. Billions of people have been lifted from poverty, prosperity has spread, and the world is a better place.
US investors’ portfolios have not kept pace with this new world. The average investor holds a 15% allocation to international stocks, flipping the ratio upside down: 85/15 allocation compared to the 15/85 global economic share of the US versus the rest of the world. Within the 15% international allocation, emerging markets stock represents a small portion. The average US investor has not and will not benefit from emerging markets growth.
There are a number of reasonable objections to increasing emerging markets stock allocation. Many companies in emerging markets suffer from poor governance, lack investor protections, and present currency risks. Their markets are unfamiliar; information is hard to come by; transaction costs are high. Could there be a better way to get exposure?
The answer is yes. Unlike in the past, when developing countries provided cheap resources to rich countries, today’s emerging economies have been prodigious consumers of commodities, and the flows have reversed. Soybeans from the US, iron ore from Australia, wheat from Europe, oil from Texas shale, and the North Sea are being exported to China, India, Vietnam, Egypt. Commodity prices have been beneficiaries of the growth as commodities are now a barometer for the economic strength of emerging markets.
Commodity markets are global but easily accessible to US investors, with deep and liquid trading venues and mature regulations. Commodity investing is a tool that deserves a bigger role in the investment toolbox.