“France has no friends, only interests.” Charles de Gaulle in response to Clementine Churchill’s admonition: “General, you must hate your friends more than you hate your enemies.”
“We must all hang together or, assuredly, we shall all hang separately.” Benjamin Franklin at the ratification of the Declaration of Independence.
While countless American tourists in Paris have echoed the first part of de Gaulle’s statement, it is the second part that sets the tone for the recent reassuring news from the continent of Europe. France, Germany, the Netherlands, Italy, Spain, Greece, Ireland and the rest of the eurozone all have their own peculiar interests at heart whenever they convene to discuss their collective or separate futures. Whether they like it or not, as either debtors or creditors, the interests of the European nations have become intricately and almost inescapably bound since the introduction of a common currency.
That I believe in this tangle of interests is of no importance. That the President of the European Central Bank believes it is of great significance. That he is willing to enter into a phase of quantitative easing to support the “system” is a bit of a sea change, in my opinion.
Stern fiscal measures in response to years of extravagant excesses have dramatically slowed or even reversed European growth. The resultant slack demand for goods has transmitted this weakness into the export-driven sphere of the emerging market countries. Equity markets in both these areas have clearly been affected by this malaise.
In U.S. dollar terms, the equity markets of China, Brazil, Argentina, and Russia are down close to 20% in the last year, as of the end of August. India is down 13.5%. The equity markets of Greece, Spain, and Italy are all lower by double digits when viewed in dollar terms. By contrast, our S&P 500 is up over 15% in the last 12 months.
While avoiding the emerging markets and showing little interest in Europe, we have tried to keep exposure to the former’s superior, long-term growth potential through a recommended overweight in the consumer staples sector in the U.S. In the last year, the staples have slightly underperformed the S&P Composite but dramatically outperformed the emerging markets. We now think that the sector has largely served its purpose. We are lowering the consumer staples sector back to a market weight and placing added emphasis on two of our other American favorites: health care and information technology.
More importantly, we are starting to look abroad again. As my colleague Dr. Brian Jacobsen mentioned in the recent September Market Roundup,
the time has come for investors to begin looking for individual names and stories in both the developed and developing markets. While certain sectors in these markets, such as financials, remain unattractive to us, others, such as export-oriented manufacturers, are priced to reflect many of the problems they face but few of the opportunities. It will be a long road back, but things seem to be finally moving in the right direction.
Vigilant capital markets around the world have pushed the ECB and an almost unanimous Europe to this action. It seems only fair that those markets should share in the benefits brought about by their tenacity. In the last year, the performance gap between domestic and foreign equity markets has been spectacular. While we still appreciate the long-term potential of American stocks, we think that the time has come to share a little of the spotlight and a little of our capital.
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