Global Update

09/29/2006 12:00 am EST

Focus:

James Stack

President, Stack Financial Management

In his update on global stock markets, James Stack reviews the tremendous growth in foreign markets, especially emerging market regions, yet he advises caution as inflation expectations may temper expansion in the short-term across the globe...

 

“Last year, at this time, we noted that major foreign markets, which had been struggling in recent months, were heading higher in spite of economists’ projections for moderating economic growth. This rally has continued, with Japan, Germany, and the UK showing solid double-digit gains over the past 12 months.

“Japan’s Nikkei is the leader, up 35% since last August. Germany turned in the second-best performance for the period, up 19%, while Britain’s FTSE is up 12%. Although this index suffered a sharper pullback than its counterparts earlier this summer, we would be far more concerned if the steep run-up had continued unabated. It’s apparent that last year’s moderating growth estimates turned out to be on the conservative side, and as we all know, stock markets love positive surprises. Unfortunately, a surging global economy can be a double-edged sword.

“The eurozone economy has now shown accelerating growth for four quarters in a row. In Japan, the biggest improvement is in personal consumption and corporate capital spending—key elements that have been missing in past export-led recovery attempts.

“It is the major emerging economies, however, where the latest figures have surprised the experts. Economists have had to revise last year’s 2006 GDP estimates substantially higher for all but two countries, Indonesia, and Brazil. China continues to lead global growth with industrial production up almost 17% in the year to July. Second quarter GDP grew 11.3% year-on-year, the fastest pace in a decade. Looking ahead, forecasters are again projecting growth in most of these economies to moderate in 2007, and we wouldn’t disagree. The reason is that robust global economies tend to fuel inflationary pressures, which put central bankers on edge.

“Already, interest rates are heading higher in many regions of the world. The US Federal Reserve recently paused in its long string of rate hikes, but a number of other central banks—including the E.U., Britain, China, and South Korea—decided to raise their key rates in August, starting to close the gap.

“Bottom line, foreign investments are still an important part of our strategy, as they increase diversification and can offer a currency hedge if the dollar continues to weaken. Keep expectations modest, however, and focus on regions that have an advantage—like Japan, where interest rates are still close to zero. As with the US, a key indicator to watch will be changes in monetary policy in the months ahead.”

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