A Global Perspective

07/14/2006 12:00 am EST

Focus:

James Stack

President, Stack Financial Management

Jim Stack, editor of InvesTech Market Analyst and InvesTech Mutual Fund Advisor can always be counted on for thought-provoking analysis. Here, he offers his view of global markets in this period of rising rates…

 

“The Fed recently added the 17th in a long line of consecutive interest rate hikes. It comes as no surprise that US markets have suffered under this continuing headwind. Since the stock market peak in early May, the S&P 500 has relinquished nearly all 2006 gains.

 

“Yet the Fed is not alone in wielding a monetary policy battle-axe. Other central bankers are becoming more hawkish and that’s bound to have an impact on international markets. As in the US, spreading inflation fears and rate hikes are taking some of the steam out of foreign markets. Here’s a brief synopsis of monetary policy in each region and how it’s affecting the stock index…

 

“In Japan, the Nikkei has retreated in recent weeks, removing some of the hot money that flowed into Japan investments at the end of 2005. Even so, this index still has the largest 18-month gain, up 32%. Japan’s recovery remains on track, and among foreign choices, we continue to favor this country.

 

“The European Central Bank is becoming more aggressive in heading off inflation. Unemployment in France and Germany has fallen more than expected, consumer spending is up, and inflation is persistently exceeding the EU’s 2% target. With three rate hikes in the bag, look for more to come.

 

Canada has persistently hiked rates since late 2005, and the market is now down 9.5% from its peak. With core inflation rising to a 29-month high in May, fears of further rate hikes are not unfounded. The Bank of Canada will make its next rate decision on July 11. (Ed.’s note: The bank left rates unchanged for now at their meeting this week.)

 

“In the UK, interest rates have consistently run higher, and the stock market cooler, compared to the other G7 nations. While monetary policy has been neutral for nine months, Britain isn’t immune to inflationary fears. Import prices are rising at the fastest pace in more than a decade and inflation in May jumped to a seven-month high. At this point, the Bank of England is not sending any signals about the outlook for interest rates.

 

“For investors…don’t look for immunity in foreign markets when interest rates are going up everywhere. International investments, however, are still important for diversification and as a monetary hedge. In our opinion, Japan offers one of the best foreign opportunities, with its low interest rates and a stock market that is still 60% below its 1990 peak.”

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