When The US Thrives, The World Prospers!

Global equity markets have sold off over the past month, on the back of fears that the Fed will begin to tighten monetary policy. What is good for the US is usually good for the rest of the world; we think investors should consider some of the attractively-valued equity markets today.

Author : Fundsupermart EQUITY MARKETS SOLD OFF ON FED TAPERING CONCERNS Global equity markets have been sold off heavily over the past month as investors worry about a potential tapering of bond purchases by the US Federal Reserve. As detailed in Top Markets 2Q 13: Taper Temper, Asia and the Global Emerging Markets have been some of the worst-hit segments as global investors withdrew capital from the region, leaving valuations of many of these markets at rather attractive levels. Curiously, investors who have been fleeing equities on fears of potential Fed tapering seem to be missing the crux of the matter – that the impending cutback in bond purchases is based on economic strength, a vote of confidence for the once beleaguered US economy. WHEN THE US THRIVES, THE WORLD PROSPERS! What is good for the economy tends to be good for stock markets (see Rising Yields: Implications for Investors), as improving economic growth boosts corporate earnings, which isthe key driver of stock market performance. Also, the sheer size and economic importance of the US economy means that any positive developments there usually results in a positive spill-over effect for the rest of the world (compare this to the often-quoted “when the US sneezes, the world catches a cold”). Continued improvement in both the housing and job market has seen US consumer confidence improve tremendously, aided also by the recovery in household net worth to a new record high on the back of rising stock and home prices. These factors have helped US consumption to remain resilient, with personal consumption expenditures (the largest component of GDP) posting 13 consecutive quarters of gains since the 2008-2009 recession. Improving US consumption is thus likely to spur various export-driven Asian and Emerging Market economies, owing to the significant proportion of exports from these countries which eventually end up in the US (the large trade deficit between the US and China is a case in point). Many economists also point to the sustained US demand for Asian exports in the aftermath of the 1997-1998 Asian Financial Crisis which allowed many of the troubled economies to post strong recoveries following the deep recession, highlighting the importance of US demand on the global trade environment. BUILDING TOWARDS THE NEXT PHASE OF PROSPERITY The recent stock market weakness suggests that investors appear to be ignoring the positive implications of an improving US economy, and have been overly-focused on the “risk” of a cutback in Federal Reserve quantitative easing, akin to a healthier patient worrying that the doctor has now prescribed a lower dose of medication. As a result of these unfounded concerns, the more cyclical markets of Asia and the Global Emerging Markets have been unfairly penalised in 2013, leaving valuations lower and making these markets more attractive for investors with a long term view. Improving economic momentum in the US has sown the seeds for the next phase of economic prosperity, and it is clear to us that as investor confidence improves, it will only be a matter of time before many of the undervalued equity markets see a swift valuation multiple re-pricing, which should translate to strong returns for investors.   SEE ALSO: Funds Promo: When US Thrives, The World Prospers! Source: Fundsupermart