So it’s either about investing around late-cycle thematics in North America or it is about heading to other geographies that are closer to mid-cycle — and that would include Europe, segments of the Emerging Market space where the fundamentals have really improved, and also Japan. These markets are not only mid-cycle, and as such have a longer runway for growth, but also trade relatively inexpensively in a world where value is scarce.
Dave gives us some geographic focus, and it’s mostly outside the United States and Canada. He likes Europe, Japan, and some emerging market countries because they are earlier in the cycle. He’s certainly right on that point, though I think we may differ on how long the cycle can persist. The past doesn’t predict the future.
For the record, in my own portfolio design, we are about 50 percent non-U.S. equities. My managers are finding lots of opportunities outside of the United States.
Wien: ‘Speculation Reaches An Extreme’
We’ll wrap up today with an annual tradition: Byron Wien’s annual “Ten Surprises” list. It always causes me a little cognitive dissonance because by definition you can’t “expect” a surprise. That aside, Byron’s list is always a useful thought exercise. Here it is.
1. China finally decides that a nuclear capability in the hands of an unpredictable leader on its border is not tolerable even though North Korea is a communist buffer between itself and democratic South Korea. China cuts off all fuel and food shipments to North Korea, which agrees to suspend its nuclear development program but not give up its current weapons arsenal.
2. Populism, tribalism and anarchy spread around the world. In the United Kingdom Jeremy Corbyn becomes the next Prime Minister. In spite of repressive action by the Spanish government, Catalonia remains turbulent. Despite the adverse economic consequences of the Brexit vote, the unintended positive consequence is that it brings continental Europe closer together with more economic cooperation and faster growth.
3. The dollar finally comes to life. Real growth exceeds 3 percent in the United States, which, coupled with the implementation of some components of the Trump pro-business agenda, renews investor interest in owning dollar-denominated assets, and the euro drops to 1.10 and the yen to 120 against the dollar. Repatriation of foreign profits held abroad by U.S. companies helps.
4. The U.S. economy has a better year than 2017, but speculation reaches an extreme and ultimately the S&P 500 has a 10 percent correction. The index drops toward 2300, partly because of higher interest rates, but ends the year above 3000 since earnings continue to expand and economic growth heads toward 4 percent.
5. The price of West Texas Intermediate Crude moves above $80. The price rises because of continued world growth and unexpected demand from developing markets, together with disappointing hydraulic fracking production, diminished inventories, OPEC discipline and only modest production increases from Russia, Nigeria, Venezuela, Iraq and Iran.