Tuesday, October 26, 2010

Where Should Investors Place Capital In Years To Come?

In 2008, many average investors saw their retirement portfolios fall between 50-60% as global hysteria gripped financial markets as a direct result of the subprime mortgage crisis.  As an accountant, you most likely have clients seeking investment advice; as you advise clients concerning different investment avenues, keep in mind that this is the most uncertain economic period of recent history, and possibly since The Great Depression.  Before we address specific investment vehicles that you may want to discuss with your clients and research yourself, there are few key points that must be understood concerning the macroeconomic environment.
Today, we are two years post-The Great Recession, and the U.S. economic recovery has stalled significantly.  Unemployment is remaining at stubbornly high levels, consumer spending is stalling, and overall economic growth is stagnating.  In late July, Federal Reserve Chairman Ben Bernanke testified before Congress and stated the U.S. recovery is “unusually uncertain.”  This uncertain outlook in the U.S. has caused great uncertainty in the realm of retirement planning and general investment because, to be honest no one is sure what will happen in the U.S. economy over the next 5-10 years; however, one scenario that will most likely not play out is a massive bull run in the stock market.  It is always good to offer clients a general market outlook and make them aware of the possible scenarios in the United States economy over the next few years, and at this time there seems to be 2 distinct possibilities.
The most realistic possibility is that the U.S. will have several years of very slow economic growth that is between 1% and 2.5% GDP.  This extremely slow growth in the U.S. will make it virtually impossible to significantly bring down the unemployment number, and investment opportunities in the U.S. will be scarce for the average investor.  The equity market will most likely move sideways for several years. 
A second possibility is the U.S. economy moves into the another round of recession as measured by two consecutive quarters of contracting GDP.  This would, of course, cause equity markets to sell-off sharply, and general global investor unrest would most likely reach very high levels.  This type of slow growth will cause major problems for the average investor.  A forex platform will offer more volatility.
One of these two possibilities will most likely play out in the U.S.   Twenty and thirty years ago, college graduates in the U.S. were assured of above average gains in the stock market as the U.S. was in a long-term bull market.  That has changed, though.  Those days are over.  As hard as it may be to hear, the U.S. economy will not grow over the next 20 years at the same rate it grew over the last twenty years.
Investors who want yield on their investments over the next 5 years should consider looking to foreign markets.  China, India, Brazil, China, and Russia are emerging markets with huge growth potential.  The growth rates over the next 5-10 years in these countries is huge.
The problem is how can an average investor take advantage of this huge growth potential in emerging markets?  A few practical guidelines should be followed.
1.        Stick to the most developed emerging markets because they have the most political and economic stability and should not collapse as some less stable emerging markets could.  These include China, India, Russia, and Brazil.
2.       Think 1950’s investment in America.  Do this in those countries.  If you can find the GE, Wal-Mart, etc in these developed nations and build a portfolio around them, you should see strong growth for years to come.
3.       Stay away from new technology companies or other companies that are still in infancy.  Any investment in these companies should be done strictly with risk capital, and they should not be a part of your portfolio nucleus.
4.       Invest in large companies in telecommunications, energy, technology, and other major industries.
You can also take advantage of this investment idea by investing in U.S. based mutual funds that are completely exposed to Chinese companies such as Templeton’s Global Opportunities Fund, Matthews’ China fund, or the U.S. Global Investors China Regional Opportunity Fund.
Another option for investors who do not want to put capital at risk in the form of foreign equities is to focus on emerging market bonds.  Emerging market bonds should significantly outperform bonds from developed nations over the next 5 years as interest rates stay at artificially low levels in the developed world.  This interest rate yield spread should entice many investors and cause a massive capital flow into emerging market bonds.
Traders who are going to expose assets to a foreign currency should check forex broker ratings to make sure they are investing with a broker that is reputable.