The lowering of corporate tax rates in the U.S. and the growing global economy hasn’t been enough to keep the equity markets moving up as we head toward the end of March. Uncertainty out of Washington D.C. including news of tariffs has given the markets some volatility. Earlier in the year, there was concern that inflation may be moving up faster than the market had thought so this brought our first bit of volatility that we hadn’t seen in a while.
At this point, I don’t see any reason for major concerns though, given the strong fundamentals around the world. It has been a long time since we had all the major economies moving upward together. Here in the U.S. many of the corporations are anticipating even higher earnings growth given the lowering of income taxes. In addition, many of the companies who have money in their foreign sites will be bringing over (repatriating) funds that should make its way back to our economy and investors (some portion of it anyway).
Perhaps a bigger picture that some may be missing is the potential impact of the U.S. increasing interest rates. I don’t mean to say that at this point that the Fed will raise rates too suddenly pushing us into a recession anytime soon. What the change in monetary stance means to me is that the reversal the monetary stimulus (Quantitative Easing) may eventually mean some ‘leaking’ of assets. What I mean by this is that the reverse of what occurred during the massive Quantitative Easing provided by the Fed and other developed market central banks will begin at some point to go the other way.
During this historical period of monetary stimulus, the Fed added about 3 and a half trillion dollars to its balance sheet to keep the economy and markets growing. This was on top of the approximate $970 billion already there. Many investors then took their cues and invested in U.S. assets. The European and Japanese Central Bank began its own version of QE, so some assets also made there way there. The ‘odd man out’ were primarily the emerging markets. Many of the countries in this index suffered from a lack of financing as investors took money from these markets and put it into the developed ones.
What this could mean is that a reversal of the U.S. for now and the other developed international markets later will become a benefit for the emerging markets. I believe that the faster growth, better balance sheets and more reasonable valuations than their developed markets ‘brethren’ provides a good opportunity to invest in the emerging markets. While the U.S. and other developed markets appear to be set for a good economy and rising markets, we may just continue to see the outperformance come from these emerging markets as we did last year.