Friday, October 2, 2009

The New World Economic Order

The G-20 summit occurred last week right here in my backyard of Pittsburgh, Pennsylvania. And no, I was not one of the black-scarved anarchists that was arrested for breaking windows!

Nothing much happened at the meeting as world leaders only met for a short time. The biggest news from the meeting had to be the announcement that the annual summit of the G-8 (the top 8 developed countries) will now be replaced by a meeting of the G-20 (which includes the major developing countries).

This passing of the baton signals an important change in the world economy. The days of US hegemony have ended, the peak of US power probably came somewhere between the fall of the Berlin Wall and the fall of Lehman Brothers. Economic and political power are slowly shifting from the US, Europe and Japan to Asia, South America and other developing nations.

The economy of the entire developing world now equals that of the entire developed world. One example - in terms of produced goods, the economy of Chindia (China and India) has surpassed that of the United States. Given the huge population of the developing world, it is easy to conclude that its potential for economic growth far exceeds ours.

What does such a change imply for us? One definite change for us is that the developing world's voracious appetite for commodities will act as a tax on us, pushing up prices for key commodities (oil,etc.) and choking off economic growth. So expect prices on most commodities to continue to head higher and to stay at elevated levels for years to come.

Such a change in the global economy also means that you should change the emphasis in your investment portfolio away from slow growing economies like the United States to the faster growing economies of the emerging world.

That's not to say that the United States is not home to many great companies. There are many fabulous American companies, but I would put an emphasis on the companies that sell a lot of their goods into the emerging economies. Companies such as Apple, Coke, McDonald's, Johnson & Johnson, Intel, Microsoft, Boeing, etc.

But the real emphasis should be on investing directly into those emerging market economies. This can be done by buying mutual funds, ETFs or individual stocks. Many individual companies do trade here on US stock exchanges in the form of ADRs - American Depositary Receipts.

My last piece of advice is to forget about those fancy long-term charts your advisor may show you that point out the fabulous long-term performance of the US stock market (although it has returned nothing for the last 10 years).

What your advisor will neglect to tell you is that much of those gaudy statistics were compiled when the United States went from being a developing economy, like China, to becoming the king of the developed nations after World War II. That scenario is impossible to repeat in the future.

So don't keep all of your investment eggs in the United States basket. Doing so and getting a great long-term return on your investment will be as likely as Muhammad Ali coming out of retirement and becoming the heavyweight boxing champ again.