For now, the best thing investors can do is buy big companies that are in all the big global markets, because most of the growth for years to come will not come from the US or Europe, observes Keith Fitz-Gerald of The Fitzgerald Group.
Gregg Early: I'm here with Keith Fitz-Gerald, chairman of The Fitzgerald Group and chief investment strategist of Money Map Press.
Keith, you've been in the market for 25 years. You're an expert in the global markets. Not only has the United States come off a big election, but China also had a major election. Where do you see the risks or the advantages for investors at this point?
Keith Fitz-Gerald: That's a very important question. I think that investors need to put this into context with what's going on in the bigger scheme of things. There's a lot of angst on both sides of the ocean.
Will Obama be good for us for another four years? Will he be bad for us for another four years? I encourage people to put the rhetoric aside. I think that Obama's victory suggests a couple things about the market.
It's a time to be stable, defensive, and ironically, compromise with regard to what you may have had as historical expectations. What I mean is, it's time to think about the big global stocks. Those are the defensive mega caps that have the experience needed to manage real growth and challenging economic conditions around the world. Most typically pay high dividends that offsets the risk of ownership, and I think they are far more stable than non-dividend-paying alternatives.
Small-cap investors better be careful, because I think we're going to have a volatile market in the next four years. And unless the small firms have something like a unique patent or a long-term government contract, that volatility is going to be more than most individual investors are prepared to accept. Most pay no income either, so it's worth pointing out that they're a crap shoot in today's environment.
Gregg Early: You're talking about more of the US-based global companies, or are you talking about things like Nestle (NSRGY) or Diageo (DEO)? I mean, firms that have broad global exposure, not just into emerging markets in particular, but everywhere?
Keith Fitz-Gerald: Well, I think that's an interesting point, and it's worth noting. The real growth is still going to come from outside the United States.
This is a numbers game. People want to dismiss this, but to do so is to really ignore the basic laws of probability and population trends on this planet. There are creditor nations around the world that are growing at double even triple our rates. Even now, many of them are led by China, so it's not just China that matters.
You can invest directly in those markets, in which case you have to stomach the volatility and you have to have an appropriate timespan. You can also invest right here at home or through European exchanges in big global companies like ABB (ABB), for example, out of Zurich, or GE (GE), Procter and Gamble (PNG), or McDonald's (MCD). All of them are moving into Asia.
It's the single biggest capital expenditure area for them because they know that's where the growth is. They expect 20%, 30%, 40% growth in the next decade. To me, that's a far more compelling statement of investment priority than investing in Europe or the United States, where you're going to be trapped with the legacy of debt for ten or 20 years.
Gregg Early: I've also heard that the demographics in China are such that because of the low birth rates, the one-child policy that they had for so long, that as the middle class grows they're contracting out work to other Asian nations, which means that their economies are growing, because now China is contracting out work.
Keith Fitz-Gerald: Absolutely. You know, this is the natural order of things. People are betting on China's fears and on their failure. What they ought to be doing is looking at basic history and betting on their success.
What China is doing with the surrounding nations is the same thing that we did with Mexico and Canada, and what Germany has done with much of Europe. They're beginning to farm out their contracted labor. They're farming out their production capacity. They're beginning to engage in regional trade, all of which makes that segment of the world more valuable than it has been in the past.
We've been down this road before. Countries that go down this path typically
do it because they have pent-up demand and because they have the capacity to do
so. Warts and all, problems and all, change in leadership and all, funny books
and all, China is in fact is still going to play a very important role in our
Gregg Early: Where does Japan fit into this picture? The GDP just came out. It was down last quarter. Are they still restructuring? There was hope that they would be getting out of the funk that they've been in for so long. Is that still a hope?
Keith Fitz-Gerald: Well, as you know, I live there and have lived there for part of the year every year for the last 20-plus years, so it's a nation I'm intimately familiar with, personally and professionally.
I hear every year that this is going to be year of the Japanese recovery-this is going to be the year that somehow the Japanese economic machine comes back. I think that's a very encouraging thought. Unfortunately, it's not a realistic thought.|pagebreak|
Japan is an export-based economy. There is an entire generation of executives that has been lost, and they are trapped by government policies that are now entering their third decade of what was supposed to be a single lost decade. I think money invested in Japan with very few exceptions is dead money, and people are going to give up a lot of opportunity in other parts of the world.
Gregg Early: Is there a risk that the US could be the next Japan? Sometimes there is talk about it, but how realistic is that at this point?
Keith Fitz-Gerald: That's extremely realistic. I got laughed out of more boardrooms than I count in 2000 for suggesting as much. People said no, we're not Japan, and they had that famous, most dangerous set of words-it'll be different this time here.
Well, it's not different. The United States is making the exact same mistakes that the Bank of Japan made, that Japanese ministers made. We dealt with the problems a little bit more quickly, but the bottom line is yes, what we're really descending into is a managed depression or a managed recession.
Unless we can figure out how to recapitalize our federal banking system and get the Fed doing what it's supposed to be doing-which is creating long-term value and economic stability, instead of short-term fiscal fixes-we're not going to do anything differently than Japan.
Gregg Early: Does the domestic election...do you see any hopeful signs with the way things turned out with at least the power of negotiation with the fiscal cliff issue, or do you just see this as more risk on top of the inherent risk that's already here?
Keith Fitz-Gerald: Well, I have to be very careful on how I select my words here, Gregg, because you know there are always good investments and there is always risk. The trick is learning how to marry the two.
To me, there are all kinds of opportunities right now following President Obama's re-election. There are opportunities in gold, for example, oil, defense stocks, and these large caps that I continually mention.
The CEOs of these various companies are in it for the profits and they're in it for their shareholders. They don't have to reform a political agenda. They don't have to fix a machine that's busted. What they have to do is concentrate on what they've always done, which is making money and growing markets and growing and selling their products.
I'd rather place my bets with those executives than with our politicians any day, and under any circumstances.
Gregg Early: I agree with that. Money has no political affiliation.
Keith Fitz-Gerald: It does not, and it knows no borders in today's world either, which I think is very interesting. With regard to gold, for example, the short-term risk is all on the downside. That's basically a knee-jerk reaction that in the event there's a falloff in stocks and many traders have begun to use gold to collateralize investments. They're going to sell that to generate cash quickly.
I think President Obama's term ironically is going to set the stage for a much higher run on gold here in the future, so I expect in the longer term, gold prices will be much higher than they are today.
Oil, I think, is very interesting. It's closely linked to economic expansion by most investors, so it's down on the assumption that President Obama's second term is going to lead to slow growth. That's a mistake.
I call this "What the World Has vs. What the World Wants," or it needs. You have to go with companies today that the world needs. Energy is one of those things that we need-60% to 80% of new demand in the next few years is going to come from Asia, specifically China. This makes companies like CNOOC (CEO), for example, especially appealing.
Defense stocks, wildly believed by everybody to take a hit as President Obama softens national priorities in our military...to me, that's a buying opportunity.
Last time I checked, the world was becoming a more complicated place by the minute, so even if our own defense spending dropped, that of our allies is probably going to rise dramatically. This is particularly true in the Asian realm, where China rightly or wrongly seems very intent on rattling sabers and flexing its economic muscle.