Over the last week we experienced several reminders of the highly sensitive emerging markets. This caused a reflection back to the Asian currency crisis of 1997 and the European debt crisis of 2011. At the time, both put global financial markets in turmoil and caused many to question the viability of these investments in a well-diversified portfolio. Looking back, we can see that both represented opportunities to add to their investments at lower prices than they are today.
Emerging markets move more sharply in both directions. The recent taper by our Fed and the ensuing strength of the dollar caused a selloff in those markets as the fear that days of easy monetary policy will alter the strength of their trading relationships. We remain convinced that emerging markets should be included as a core foundation of a portfolio and that this is a phase.
I am positive in the long term for two primary reasons:
- The middle class in developing Asia and Latin American countries is continuing to raise their standard of living. As wages have increased in these markets over the past decade, the demand for technology, housing, entertainment, and protein-based foods has continued to increase.
- Growth rates in that part of the world remain far above our own. China, India, Vietnam, and Indonesia all expect to grow at rates in excess of 5% in 2014. While that growth will be choppy, it is still at a pace nearly double that of the U.S.
What are we watching?
Several important dates are on the calendar as we move into February that are worth noting.
February 7th – This is the date the U.S. loses authority to borrow and the debt ceiling issue resurfaces. The budget deal that was reached last fall allows the Government to fund expenditures through September 2015 and the ability to borrow to meet those expenses ends on Friday. The U.S. department of Labor will also report its monthly payroll data for the month of January.
March 31st – The Affordable Care Act individual mandate penalties apply. The President’s health care reform requires that all Americans have health insurance. To reduce the cost of this program, a 3.8% tax on investment income was imposed on the highest tax earners in 2013.
Our team will be monitoring markets closely as the events on these dates could add to the volatility seen over the past month. Despite January’s market behavior, we remain optimistic on the financial markets. Last week’s GDP number indicated that the US economy should grow by over 3% in 2014. We are in the core of earnings season and more than 75% of companies have met or exceeded expectations. This slow growth environment grounded by a Fed that has committed to keep borrowing costs low, is a positive backdrop for stock prices to finish 2014 higher than they began.
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