The world is in a precarious situation today. After a semi-successful recovery from the greatest financial crisis since the Great Depression, we are now facing rising populism, protectionism, and fears of global slowdown.
I see similarities between our situation today and the 1930s in terms of asset values, monetary policy, rise of populism, and where we are in the economic cycle.
Moreover, we have a rising power, China, challenging an existing power, the United States. Over the last 500 years, this has happened but 16 times. In 12 of those cases, the result was war. Not a trade war but an actual war.
Now, I’m not saying we are on the brink of another Great Depression or World War III. However, the situation is unique and requires you to be picky about your investments.
U.S. Stocks—Are We Nearing The End Of The Longest Bull Market Ever?
Depending on which metric you use to define a bullish cycle, we are either in the longest one on record or at least one that’s much longer than average.
Of course, other factors must be considered when determining a cycle’s stage, but to believe that we haven’t yet entered a late cycle would be ignorant.
Interest rates are rising steadily, unemployment rates are at all-time lows, fear and volatility have returned to the stock market, and the first signs of a contracting economy are appearing.
The length of a late cycle depends on a series of factors that differ one cycle to the next. The most important thing to understand overall is that bear markets happen gradually and then suddenly. Active money managers who spend days studying the market may recognize the transition more accurately, but, as a private investor, you should begin taking action when things are still declining gradually, rather than pushing your luck chasing the market top.
If you’re looking to invest in the U.S. stock market at the current stage, I would recommend looking at the defensive sectors. Consumer staples, utilities, telecommunications, and health care… as well as REITs traditionally provide better returns at this stage. That’s because these are considered basic needs, things consumers spend money on no matter what, unlike cyclical sectors, which flourish when the economy is expanding.
European Markets—Pestered By Brexit And Italy
Europe is a different story. The post-recession period was not as productive as in the United States, and it took the old continent a lot longer to show signs of recovery.
Today, Europe is still in a mid-cycle phase and would be a good option for investment… if not for two things.
I’m speaking about Brexit and Italy.
Italy is the tougher problem of the two. Euro- and EU-skeptics comprise the current ruling coalition in this country, which is also arguing that Italy should increase spending. Typical populist positions supported by no sound reasoning. Italy is already the second most indebted nation in the EU, surpassed only by Greece, and its GDP is lower than it was in 2005.
Snap elections are coming up early in 2019, which will not only decide Italy’s future but also the future of the EU and the euro. The country represents 11.2% of the union’s GDP, and, if the populists manage to win this election, Europe as we know it will be over.
Moving on to Brexit…
We are getting closer and closer to March 29, 2019, the day Britain will exit the EU. Over the weekend, Brussels finally accepted Theresa May’s deal. I wasn’t surprised. The U.K. represents 15.2% of the union’s GDP, the second highest contribution among members. It’s too big a market to let go.
Now it’s up to Prime Minister May to push the deal through the divided U.K. cabinet. That’s not going to be an easy task. The opposition is rallying hard against her, criticizing that the deal favors the EU. The uncertainty is scaring away investors. However, chances of a hard Brexit are slim. Great Britain can’t afford to gamble away access to the European Single Market as it exports 44% of its goods to these countries.
If you’re looking at European stocks, your best bet right now are those from the U.K. They have been depressed since Brexit was announced and present less risk than their counterparts across the Channel. Chances of London and Brussels making a deal are high, which would better benefit British stocks.
Emerging Markets—Last Chance For Double-Digit Gains
Emerging markets (EMs) had a turbulent 2018. The rise of protectionism is a serious concern for the EMs, as these are traditionally exporting economies and tariffs hurt them the most.
Moreover, protectionism puts pressure on global trade. We experienced a brief period of synchronized global growth from late-2017 to early 2018, but hopes of it continuing disappeared when President Trump announced the first set of tariffs.
As protectionist ideals continue to spread, it’s important to focus on regional rather than global trade. Old trading ties may be falling apart, but new ones are forming.
Getting cut off from trade with the United States pushed Asia-Pacific nations to form new free trade zones, for example. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor of the Trans-Pacific Partnership (TPP), will take effect early in the New Year 2019 and will represent 13.4% of the world’s GDP.
Furthermore, 16 countries, including ASEAN nations, China, Japan, India, South Korea, Australia, and New Zealand, are discussing a Regional Comprehensive Economic Partnership (RCEP), which is set to become the largest free trade zone in the world.
With developments like these and current price levels, emerging economies represent some of the best opportunities on world markets today. As the EMs mature, high returns will diminish. I believe this is your last chance to lock in double-digit gains, which is why I’ve prepared a special report detailing 7 stocks that represent the best the emerging markets have to offer.