Many of you may be particularly concerned about the developments related to debt in the eurozone and the U.S. over the last few weeks. I’d like to take this opportunity to share my thoughts on these events and respond to a couple of reader’s questions.
How concerned are you about the current problems within the eurozone and with U.S. debt?
– Peter, United States
To me, the European debt situation does not seem as serious as the U.S. debt crisis, both in terms of scale and the possible impact on the global economy. As such, I believe the world’s focus should really be on the U.S. debt crisis. We also have to remember that the tolerance for debt is generally affected by investor confidence levels. Therefore, we must focus on reinstating confidence, which may be impacted if debt levels rise. Increasing debt levels may lead to a weaker currency, as investors may shun currencies of countries burdened by debt. One possible way to counter the effects of a weaker currency is to make investments that could potentially increase in value over the long-term and could thus potentially help reduce the value-eroding effects of inflation, which can result from a weaker currency.
In Europe, we will continue to closely watch the region’s emerging markets, particularly Romania, Russia and Poland. In Romania, we continue to see plenty of opportunities, especially in sectors such as energy and transportation. I’m also very excited about Russia, where we see high growth potential, particularly in the agriculture, natural resources and oil sectors. We believe Poland offers potential resulting from its strong political structure and what has been its positive gross domestic product (GDP) growth. In fact, Poland was the only country in the European Union to maintain positive GDP growth throughout the 2008-2009 global financial crisis.
I wanted to put a quick note out regarding the U.S. debt downgrade and the events of the past week as we have been getting a number of questions from readers and twitter followers. Standard & Poor’s potential downgrade of U.S. debt had been signaled for a few weeks, so it did not come as a complete surprise. In fact, some smaller rating agencies had already downgraded the U.S. Nonetheless, the initial market reaction will likely be a high degree of uncertainty and volatility, since investors will likely not know where to turn for assets with lower short-term volatility. During the subprime crisis, investors largely sought such assets in U.S. Dollars and Treasuries. While during the subprime crisis the USD index was high, now it is low reflecting a changed perception of markets that may be considered less volatile in the short-term. In particular, we believe currencies and stocks of emerging countries may look relatively attractive given: (1) emerging markets generally have more foreign reserves than developed countries and (2) the debt-to-GDP levels of emerging countries tend to be lower than developed countries. This improved ability to manage their currencies and historically better ability to service debt is why we believe emerging market currencies have been so strong – and may continue to be.
Increasing economic activity in emerging markets has continued to push up the demand and prices for key resources such as metals and oil. Infrastructure spending is a key factor driving this rising demand, as more of the working population in emerging markets move from rural areas to the cities, increasing consumption and putting upward pressure on both hard and soft commodities. I think long-term commodity prices are likely to be driven by rising global demand as well as increasing costs to obtain these commodities.
Over the next decade, global demand for natural resources is projected to rise by at least a third. With their rapid economic growth, emerging markets are becoming bigger consumers of natural resources, particularly energy resources. China and India, each with over one billion people, are requiring more electric power, water and fuel for a growing army of automobiles and trucks. China is the world’s largest energy consumer, the world’s third-largest net importer of crude oil, and also the second-largest energy producer in the world after the U.S. Over the years, we have seen many countries that were originally energy independent or even energy exporters, like Indonesia, themselves become significant importers of energy.