Now emerging and developing economies account for almost 60% of global gross domestic product (GDP).
Understanding the full scope of these changes, and the new roles of these participants in the global economy, is essential for investors looking to position their portfolios for the future.
Marc Faber, editor and publisher of the Gloom, Boom & Doom Report, shared his perspective on these shifting dynamics along with his concerns that policy makers have increased the risk of unintended economic consequences, at the 2016 Financial Analysts Seminar in Chicago.
China occupies an important space in the current economic landscape. The country embraced the infrastructure growth model to catapult itself into a high-growth phase — following the examples set by Japan starting in 1950 and the Asian Tiger economies of South Korea, Taiwan, and Singapore in the 1960s and 1970s — and it has been the driver of substantial economic activity
Tourism spending has created additional economic links between China and other countries. Outbound tourism expenditures from China reached US$215 billion in 2015, which was a 53% increase over the total recorded by the World Travel &
As a key driver of economic activity
As the emerging market economies in Asia have developed, they have built up their own domestic needs and capabilities. The increased consumer demand within these countries has created investment opportunities for regional partners: In the first seven months of 2016, the three largest sources of foreign direct investment in Vietnam were South Korea, Singapore, and Japan. While productivity in developed markets has stagnated due to excessive regulation and rising levels of unproductive debt, productivity is booming in Asia.
Faber said the current system in the developed markets is not sustainable and will come to a bad end. He declared that the change in hours of work needed to buy one unit of the S&P 500 composite — which climbed from 20 hours in the 1960s to almost 100 today — was evidence of the massive wealth inequality created by monetary policy that has made it more difficult for those on the lower rungs of the economic ladder to climb up.
Faber takes a dim view of central bank activities that have led to a substantial increase in the size of their balance sheets. Although central banks can continue these policies indefinitely, he noted that eventually they will own everything, resulting in backdoor socialism. The present-day reality of central bank activity is that stock market capitalizations relative to GDP are way above historical averages. Consequently, Faber thinks that US investors will be lucky to earn 1% or 2% returns per year.
With so much latent risk in the financial system, one might be tempted to shift substantial amounts of a portfolio to cash. But even cash is risky today. “Cash is the safest investment in normal times,” said Faber. “However, today the most dangerous asset is cash. Cash in bank accounts may be worthless like in Cyprus,” referring to the possibility of a state-imposed bail-in putting deposits at risk.