It is very likely you have some new and broad reaching concerns. The current ad-ministration’s policies to help re-start the credit markets and invigorate the US economy may create some unintended consequences. Although there are numer-ous ways to gain exposure to benefit from these potential concerns, one considera-tion may be to find a single investment vehicle that targets more than one issue thereby increasing your chance of success.
Emerging Global Advisors research has identified three concerns for US Dollar-based investors…
Slow or Contracting Domestic Economic Growth
US GDP expected to shrink in calendar year 2009, but there are signs of a turnaround. Any opti-mism, however, is predicated on positive growth out of the emerging markets but especially from China. Current evidence suggests that the GDP premium from emerging markets versus developed markets continues to be intact. Thus, investors will be keen to diversify among the various equity risk premiums available around the globe. If expected GDP is higher in the emerging markets yet their overall market capitalization (as a proportion of that of the whole word) is relatively small, then this mismatch will have to be corrected and increased flow to the region will help alleviate this. The truth is that many US investors have a 0.0% exposure to emerging markets or something very close to this. In time, we believe the emerging market’s ratio of GDP/market cap will be closer to that of the developed world.
Inflation
Future purchasing power is a concern for any investor (pension, endowment, individual, govern-ment). Global economic stimulus packages in addition to monetary policies similar to that of Ja-pan’s Zero Interest Rate Policy (ZIRP) has made one thing clear: Something has to give. The first obvious sacrificial lamb is inflation. This is one reason for the popularity of commodities as an asset class. Gold is considered a proxy currency as much as a hedging vehicle. However, as with any other asset category, diversification matters. Going beyond gold to other precious metals as well as base metals is a prudent step. Furthermore, enhancing this with exposures to producers of these materials is a good diversification move to introduce equity risk assuming we are not near a major market top. In this case, investors will want to have broad exposures to miners across the globe who produce a diversified set of materials.
Weakening Dollar
The second sacrificial lamb is the dollar. A strong dollar favors domestic investing while returns from foreign exposure are degraded due to the exchange rate. Conversely, a weak dollar favors foreign exposures. Intuitively, diversification matters now as it did in 2008 despite high correla-tions. Many investors ignore the importance of currency diversification. If you don’t like the US dollar, diversify by currency. The global deleveraging process is bringing asset class correlations back closer to normal. However, holding US equities that derive significant returns overseas is not effective diversification. If you’re looking for an investment to hedge against a falling dollar, you may want to consider holding foreign securities directly or funds whose underlying exposures to foreign markets are not hedged.
Information represented in this piece does not constitute legal, tax or investment advice. Investors should consult their legal, tax and financial advisors before making any financial decisions.
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