Markets often climb a wall of worry, as the maxim goes. The trick is is to judge how steep the gradient of that wall is at any point in time. The fuel of corporate profit growth has temporarily lowered the gradient, and major US indices moved to marginal new highs yesterday. The bullish case for world markets could be encapsulated as follows:
- Globalisation is leading to greater economic stability & commensurately lower financial volatility. Related themes: manufacturing as a mug’s game; outsourcing & platform companies; US industrial production volatility near historic lows; record high cash flow margins as % of GDP; financial revolution allows optimisation of corporate balance sheets, freeing up capital; ideas & people orientated economies generate high returns; invisible component of trade figures lost in corporate accounting, transfer pricing etc,
- Emerging markets - overworked as a ‘theme’, yes, but it reminds us of the earlier days when all the talk was how IT, the Internet and fibre-optic cables would transform the global landscape. How many times can you read this stuff before glazing over?! Well, not that many for most of us perhaps, but it doesn’t make it one jot less true; Likewise for the emerging economies, or BRICs, or Chindia. Emerging markets (EM) are the biggest thing, next to the technology revolution, to happen in our investing lifetime. Half of Chinese workers are still involved in the worst industry known to man (from a volatility & returns point of view): farming. Farmers there earn $300/year, whilst the new urban workers earn 10x that amount. As this unprecendented shift gains momentum, this is driving massive gains in productivity, consumption, home ownership, mobile phone ownership, motorway miles, power plants, coal extraction, infrastructure growth, university enrollment, new cities….shall we stop there?
- Low inflation and low interest rates are directly related to the first two major themes which increasingly are driving so many of the global trends and corporate activity we see in all markets. China is now a large net exporter of machinery and capital equipment. Twenty years ago it was plastic toys, now it’s cutting edge cutting tools and a myriad other products, accelerating the growth of other parts of Asia and the third world to industrialise quickly and cost-effectively. The China price is now starting to be replaced by the Vietnam price, or the Sri Lanka price, or the Indonesia price.
- The US may confound the bears, and continue on its steady growth path, despite a significant, much-anticipated housing market slump. Were this to materialise visibly, one major worry would be diluted away to a large extent. Of course, other factors such as Middle Eastern instability, the price of oil, Chinese stability, to name three, would not have been removed from the list of worries. But a US economy that once again proves it can organically grow through a major challenge, much as it did in the early 90’s after the Savings & Loans crisis (now that really was a crisis) will send a signal to the world economies that this decade may, after all, be one of prosperity and sustained growth.
