Since I write quite a bit and talk about investment opportunities in international markets, some may get the impression that I am not very interested in the prospects of investing in American stocks. In addition, most exchange-traded funds in the Chartwell ETF Advisor portfolios have been international or global since early 2003.
But I seem to be more confident in America’s future than most. A recent poll conducted by the Chicago Board of Global Affairs found that 55% of respondents believe that in the next fifty years, the United States will be equal to or superior to the world power. A group of Chinese respondents believe that their country will catch up with America in global influence within ten years.
In my opinion, while the world is clearly filling up, and new competitors like India and China are rapidly catching up with us because of rapid advances in technology and communications, the American economy is more than holding on.
And as the valuation gap between U.S. and foreign markets has narrowed significantly, I believe that the overall performance of the U.S. stock market, and in particular some sectors such as finance, technology and healthcare, may be ahead of global markets. The US dollar may also surprise pessimistic experts. Our ETF portfolios will adjust accordingly on an incremental basis and are likely to be balanced between U.S. and international markets soon. One of my favorite ETFs, the iShares S&P Global 100 (IOO), reflects this balance well, giving investors access to the world’s 100 largest companies, 50% of which are American.
On what do I base this renewed confidence in American markets? Let’s start by reviewing America’s strong current position, its competitive advantages and, most importantly, where it is heading.
America accounts for about 23% of world GDP, and from 2003 to 2006, US GDP was larger than China in its history. California’s GDP is twice that of India. In addition, 693 of the world’s 2,000 largest companies and 83 of the world’s 200 largest companies are located in America.
Americans received all the Nobel Prizes in Science in 2006. 46% of the market capitalization of the world’s 200 largest companies are American. It has the deepest and most liquid capital markets with companies listed on the NYSE, with a total value of $ 15 trillion – three times more than its closest competitor, Japan.
The restructuring of the American economy, while painful for many, has created a very flexible economic platform that has created 30 million new jobs over the past 20 years, while Europe has created zero new jobs. America is still the most dynamic of the major industrialized nations with 75% of the current Fortune 100 companies not even existing in the 1980s. In terms of ease of starting a new business and the number of new companies, no other country is close. America remains open to business – worldwide.
Even in manufacturing America remains a powerful power with a larger share of the world market than any country, and with a production volume twice that of our nearest competitor, Japan. There are also signs that as wages and other costs increase in emerging markets, concerns about quality, protection of intellectual capital and logistics are growing; offshore production will soon begin to return home.
And the U.S. will increasingly be seen as a safe haven for investors as uncertainty in the world grows with the constant challenge of radical Islam, the more prone stance of Russia and China, and reduced defense spending in Europe.
Although the U.S. dollar has lost ground over the past few years, the pendulum is likely to turn the other way, and its status as a key world reserve currency is unlikely to be challenged for very long.
As I mentioned earlier, most international stock markets have outperformed broad U.S. indexes since 2003, but the gap in valuation has narrowed significantly, and the inevitable return to the average signal that the tables are starting to turn.
For all its shortcomings, the U.S. political system is the most transparent and stable in the world and far superior to multi-party parliamentary systems, such as in India, where a small member of the Communist Party coalition can slow down market reforms. When making decisions, investors tend to take into account economic factors much more than political ones, but in many cases politics is more important. Large bullish markets, such as we now see in Australia, Ireland and India, began with ambitious market reforms.
Next is the demographic perspective. The US, largely due to immigration, continues to grow, while much of Europe, Japan and especially Russia are declining rapidly. Although much of Asia is home to a relatively young population, China is an exception, which will put a huge strain on its budget.
But my greatest belief in America’s golden future is based not on what it has achieved or on its current position of strength, but on how it is being renewed and reformed to respond to growing challenges from countries like India and China. Our continued commitment to freedom, openness and flexibility is key to our continued strength, innovation and leadership.
Instead of being content and complacent, America will move toward significantly simplifying the tax system (one simple tax rate?), Relentlessly innovating in education according to lines outlined this week by Bill Gates in his U.S. Senate testimony, use leverage our huge consumer market to open up overseas markets, reform our credit card industry and impose restrictions on federal spending growth combined with reform of eligibility for payments. Our foreign policy will also become more pragmatic and will avoid extremes of isolationism and adventurism that are not based on national interests.
I am confident that all of these reforms and more will be achieved because they need to be to keep America on top. Americans do not agree to less.