Emerginvest Blog

Thankfully 2008 is behind us and its time to look at what is in store for 2009. As a trader I base most of my decisions on technical setups. It provides for excellent risk/reward opportunities and eliminates the primary flaw of fundamental analysis - they are a lagging indicator with the worst at the bottom and best at the top. However, markets don’t move because a chart says they should. The charts merely reflect the collective opinions of future growth by all market participants. Therefore, it is important to have a fundamental thesis behind the trades you are making so you can understand why a chart looks a certain way rather than deferring exclusively to a technical setup. With that, I want to explain my expectations for world economies in 2009 and how I will be looking to trade them. I will follow this up with specific markets and companies in my next post.

Any discussion of world economies must start with the US because for the time being, we are still the dog wagging the tail. The US is still in the process of dealing with one of the biggest financial crisis’ in history. The ramifications of which will be felt for decades as confidence will be slow to return and new regulations will be enacted to restrict financial institution’s ability to take on risk. Many pundits love to compare this crisis to the one Japan experienced in the late 80’s. I believe those comparisons are justified for this crisis. In both countries, banks were over-leveraged and these risks were exposed by a deflating real estate bubble. There is one huge difference between Japan of the 80’s and the US of now – consumer debt. The Japanese entered their recession with a personal savings rate of over 10%. By lowering interest rates to zero, the Japanese government encouraged the populace to stop saving and start spending. And that policy worked. Savings rates dropped and consumption rose. But guess what? The Japanese economy has never had a sustainable recovery despite the increase in consumption.

Now fast forward to present day and the US consumer. Up until last summer, the US savings rate was hovering around 0%. Compound that with the fact that the third quarter was the first time since 1952 that the average American paid down debt! Think about that – since 1952 until now, the average American has been consistently building more and more debt. So now we enter the most severe recession since the Great Depression where unemployment could easily top 10% with a consumer over-burdened with debt and no money to pay it off. In my opinion, this is the next crisis to hit the US and it will take a lot longer than one year to play out. Consumer spending will continue to decline which will further hamper any recovery. The Fed can do everything in its power to make credit more available and encourage consumers to spend, but it won’t mean anything unless we get a miraculous improvement in the job market and confidence that a recovery is on the way.

One could reasonably assume that I am an ardent bear since I expect the worst to come. However, I believe there is a lot of opportunity in international markets for those looking for longer term investment opportunities. They suffered right along with the US during this financial crisis and their stock markets reflect that down turn. The difference is that their economies are not over-leveraged with debt, so they are better positioned for a rebound. The de-leveraging that is taking place in the US does not have to happen in these other economies. Plus, the fiscal stimulus proposed in these countries should actually have an effect in encouraging more growth in consumer spending as opposed to relying on exports. Consumer spending is a much smaller percentage of GDP in emerging economies and thus has more potential to provide growth as exports lag. This has already been happening in China where November retail sales numbers experienced a 20% year-over-year increase.

I believe the best case scenario for the US is a stagnant economy that slips in and out of recession for the next few years. It will take time for this economy to delever and that process will be painful as we have already started to see. The stock market will continue to trend down, but nothing goes down in a straight line. I do believe the worst of the declines are behind us and we could see a sharp rally in 2009. But do not be fooled into thinking all is well. The government is pumping trillions of dollars to stimulate the economy. That is not a sign of robust, healthy fundamentals. Even as the US and Europe falter, growth still remains in the emerging markets. And foreign investments should increase as domestic investment opportunities will be slim. With emerging markets down as much as 60%, this is a great time to begin to build positions in those countries that can grow without the US. Check back next week for specific markets and companies I feel offer the most attractive opportunities for 2009.

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Filed under: Chris (Technical Analyst), Emerging Markets, World Analysis