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If 2019 was (and it sure was) the year for putting money into U.S. stocks, will 2020 be the year for putting money to work outside the U.S. and especially in emerging market stocks?
The answer from a large–and it seems increasing–number of Wall Street strategists is “Yes.”
Should you follow this year’s advice?
Let me count the whys (and why nots.)
First, to be appropriately cynical, we all know, even in this day of $0 trades at discount brokers, that Wall Street makes a lot of money trading stocks so a year when the advice amounts to sell what we told you to buy last year and buy this whole new bunch of stuff makes good business sense–for Wall Street.
Second, to be somewhat less cynical but still cynical, this advice is based on a certain simplistic view that asset prices revert to the mean. So after a 30% return from U.S. equities in 2019, it must be time to switch to the recently underperforming asset, emerging market equities.
Third, there is some macroeconomic foundation for this advice. Economists on and off Wall Street (at the International Monetary Fund, for example) have begun projecting that economic growth in the United States will dip slightly next year and that economic growth in the global economy will bottom sometime in 2020 and then sometime in 2020 accelerate at a speed that will push growth above that in the U.S. economy. The slogan that I’m hearing a lot, in various forms, is that the United States will go from lead to lag. As I posted yesterday, China’s economy grew by 6.1% in 2019. That’s down from 6.6% in 2018. But the 2019 figure meets the government’s target, and December industrial output rose 6.9% year over year, ahead of the 5.9% forecast by economists. Retail sales climbed by 8% against a forecast of 7.9%. In the United States, however, the International Monetary Fund and a growing number of economists are projecting that U.S. economic momentum will fall behind that in the rest of the world as global growth bottoms and then picks up slowly in 2020. The pessimistic end of economic forecasts, such as those from JPMorgan Chase global economist Michael Hanson, are looking for 1.7% growth for the United States in 2020 after 2.3% in 2019. That same forecaster sees global growth holding steady at 2.5%.
Fourth, U.S. stocks are expensive, and emerging market stocks are less so. The forward PE–which is based on earnings forecast for the next 12 months–for U.S. stocks is 18.7, according to Yardeni Research. The forward PE for emerging markets is just 12.7.
So what do you want to do about this Wall Street advice?
It’s striking to me that the Wall Street strategists making this all don’t talk much about risk-adjusted returns. One of the reasons that U.S. stocks are more expensive than emerging market stocks right now is the perceived difference between the relative safety of the United States and emerging markets. Here it is important to remember the advice the park ranger gives a party of hikers: In case of an attack by a bear, he says, remember that you don’t have to be the fastest runner. You just have to be faster than the slowest runner. At a time when the nightly news can make it seem like the United States has fallen apart, it’s important to remember that recent events in Brazil, and Chile, and Turkey, and China, and Australia, and the United Kingdom, and South Africa have even more profoundly challenged the basis fabric of those countries’ economies. Would you rather put your money in the Brazil real or the U.S. dollar? Does the U.K. economy seem more or less stable than the U.S. economy?
In other words, I don’t think that the preference for overseas, and especially emerging market equities, has as much fundamental support as the current barrage of Wall Street advice suggests. The tide isn’t strong enough to lift all boats. I’d so with stock picking rather than an all out shift in portfolio allocations.
But I don’t think you can discount the power of the Wall Street advice machine to set market direction for a while. There’s a reason for the Wall Street joke from about the broker and his friend looking out over the yachts in a marina that has the friend ask “So where are the customers’ yachts?”
I think that, for a while, you will be able to make money on this advice as it pushes money into global non-U.S. assets. If you want a cynical play on this trend–and a hedge that Wall Street is actually right about the relative performance of U.S. and non-U.S. assets in 2020–I think following the recommendations of Goldman Sachs (GS)–as long as you follow them early, regard them as a cynical trade, and get out early as well–is way to tap into one of Wall Street’s most powerful and successful trend marketing machines. I recently saw a Goldman recommendation for Brazil’s Linx (which trades as an ADR in New York under the symbol LINX.) The company is the largest retail management software company in Latin America with a 40% share of the Brazilian market. The recent strategy involves using that huge market position to sign up partnerships to generate even more growth. For example, Line has recently set up partnership with Rappi, a Latin American creator of an on-demand delivery app, that will enable brands in Linx’s portfolio to sell through the Rappi app. Another is with PicPay, one of Brazil’s largest payment apps.
I’m adding Linx to my Volatility Portfolio on my paid subscription sites JugglingWithKnives.com and JubakAM.com as my hedge the Wall Street might be right about 2020 and a bet that Wall Street’s marketing calls can still move cash flows. At the moment I’d call this a trade for no more than 6 months.
