Global Growth Still Powers Markets

11/14/2007 12:00 am EST

Focus: GLOBAL

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says strong global growth should continue, powering world stock markets higher.

Despite increased volatility, stock markets ended an often scary October in the positive. The Dow Jones Industrial Average eked out a 0.4% gain and the broader Standard & Poor’s 500 index gained 1.6%. The NASDAQ Composite index climbed 5.8%. (Markets, of course, have sold off in November—Editor.)

Besides natural resources, technology has been the strongest domestic sector this year. With two months left in 2007, NASDAQ may post its best annual gain of the decade; it was up over 18% through October. While large caps continued to outperform small, growth continued to outperform value.

The combination of the Federal Reserve’s rate cut and strong economic news encouraged investors who otherwise are constantly barraged by the media selling fear and gloom. While the housing recession and high-energy price environment provide good ammunition for the fear mongers in the press, the US economy expanded faster than expected in the third quarter, led by export sales. A surprisingly strong jobs report and an unexpected rise in factory orders provide further evidence of growth.

Indeed, the big story is strong global growth, especially in emerging markets. Global economic growth is a powerful force, and gains from continued expansion of global trade and free flow of capital will be tremendous.

A tendency to let fear foster isolation is a real danger. While most of the world is embracing globalization, we are hearing some rhetoric about protectionism in the US. We hope that as fears give way to the realization that global free trade is in everyone’s best interest, the US will continue to take a proactive leadership role in this process as we have done so successfully in the past.

A market environment of strong global growth favors energy and natural resources, industrial and building materials, and technology. Large companies are more likely to benefit from global opportunities and they are also better able to withstand challenges in the credit markets. The dollar has continued to slide, [recently] hitting yet another low against the euro, as lower interest rates make it less remunerative to hold dollars.

Outside the US, stocks continued strong. The MSCI EAFE index gained 4.3% in October, bringing 2007 gains to nearly 18%. International funds continue to dominate the top ranks in all classes. During the 1990s, the US stock market was the hot place to be, but over the last five years, the average international fund has outpaced the returns of domestic equity offerings by almost ten percentage points. Returns from funds focused in Latin America, China, India, and other parts of Asia have been particularly high.

The world’s market capitalization is rapidly shifting outside the US. As recently as 1970 the US owned 67% of the world’s market capitalization. A decade ago it was down to just 44%. Today the US is about 40%. Yes, we’re growing, but the rest of the world is growing faster.

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