China is creditor country while the US is the largest debtor country in the world. China has also one of the low debt to savings ratio in the world as shown in the chart below:
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Source: 5 Big Risks Posed by China (And Why They Shouldn’t Crash Global Markets in 2017) by Michelle Gibley, Charles Schwab
China’s debt to savings ratio(as a % of GDP) is especially low when compared to developed countries.
US stocks have performed well in the past few years relative to other developed and emerging stocks. Emerging market stocks have been especially poor performers for many years until now.
While the S&P 500 is up by about 7% so far this year, emerging markets such as Brazil, Russia have soared by 42% and 30% respectively. Among the developed European markets, most are under-performing the US with the exception of UK where the FTSE 100 has gone up by over 12% year-to-date.
In general, though US outperform foreign stocks it does not mean one should ignore foreign stocks. US stocks outperform in some years while foreign stocks in some others. Nether US or international stocks continuously remain the top performer year over year.
The following chart proves the above concept:
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Source: Vanguard Blog for Advisors
So the key takeaway is that investors should diversify internationally and not just focus on US stocks alone.
Related ETFs:
Disclosure: No Positions
One of the main themes that is dominating business news nowadays is interest rates. More specifically the question on everyone’s mind is when will the Federal Reserve increase the fed funds rate from the ultra-low rates now. The talking heads, pundits, fed watchers and other experts debate this issue on a daily basis in the media, ordinary investors need to understand how rising rates will affect their everyday life. For instance, what is the impact higher rate on mortgage, auto-loans, credit-card debt, etc.
The following neat infographic from Charles Schwab explains the answers:
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Source: What Rising Interest Rates Mean for You, Charles Schwab
The presidential election in November will decide the winner of the highest office in the land. The US President is often depicted as the single most powerful human being on the planet. He is often considered to have God-like powers to do almost anything he desires. Hollywood and the media has created a myth that the person occupying The White House can battle aliens, vampires, evil-doers, ghosts and any other forms of home invaders. In reality, the US President’s powers are restricted due to the concept called checks and balances. Basically the President can do certain things without asking for approval from anyone such as the Congress. For example, the President can launch a war on a foreign country without the approval of congress or secretly authorize the elimination of foreign leader without asking anyone including the Congress. There are a few other powers that US presidents have such as the power to pardon someone after being convicted of a crime, withdraw from global treaties such as Anti-Ballistic Missile Treaty, etc.
In a nutshell, the President is neither toothless nor omnipotent. Or put it another way, he is not a puppet or a dictator.
Similarly from an economic perspective also, the Presidents powers are limited. So investors need to focus on fundamentals of a company, economic factors and other factors that they normally use to evaluate an investment. They should not simply focus on who is going to the next US President.
The below chart shows the US economic growth during various Presidential terms from 1945:
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Contrary to popular belief, the US economy has performed well under Democratic presidents than Republicans during the period show above. The average growth rate under Democrats and Republican presidents were 4.3% and 2.5% respectively.
Source: The end of the empire?, Compass Q4 2016, Barclays
The key takeaway is that all the drama about the US elections is simply noise for an equity investor. Instead of worrying about who is going to be winner they must make their investment decisions based on fundamental factors.
Defensive stocks such as utilities and consumer staples are in a downward trend since the beginning of second half. These stocks were top performers from the start of the year as investors bid them up seeking yield and stable growth. Utilities and consumer staples are down about 10% and 6% respectively from their peak earlier this year.
Russ Koesterich, CFA Head of Asset Allocation at BlackRock wrote an article stating that defensives are not cheap now and that investors looking for value must consider technology stocks. I do not agree with his argument in favor of stocks in the technology sector.
Here is an excerpt from the article:
No good bargains after all
Utilities, consumer staples and other defensive names are still expensive relative to their history, and in many cases, their fundamentals. Large cap utilities stocks are trading at a premium to their 20-year average relativeprice-to-earnings (P/E) and price-to-book (P/B) ratios (source: Bloomberg). For example, over the past 20 years the S&P 500 Utilities Index has typically traded at around a 25% discount to the broader market. Today the discount is less than 20%.
Nor do the valuations look any better when adjusted for fundamentals. Comparing U.S. consumer staples stocks to the broader global market based on profitability—one of the factors that investors usually note to justify the premium—these stocks appear to be some of the most richly valued in the world.
Source: Why defensive stocks are still not cheap, Russ Koesterich, Blackrock
In addition, he noted that defensives are more vulnerable to even a slight increase in interest rates.
Though the above argument makes sense, his recommendation for investors to consider technology stocks as offering value at current levels is not correct. Investors should not never consider switching defensives with tech stocks. These two types of sectors serve different purposes. So they are not interchangeable even at the current elevated levels of valuation for consumer staples and utilities.
A few reasons why technology stocks are not value investments are listed below:
Disclosure: No Positions