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Jim Paulsen: Why You Should Invest Outside of US
Aspire, Thought Leaders | 23 November 2015
By: Raymond Leung
Articles (142) Profile

As the US reports stronger economic data, tightening monetary policies by the Federal Reserve appears more imminent. Currently, Chief Investment Strategist at Wells Capital Management Jim Paulsen is telling investors to invest outside of US.

Why should investors take their money out of US when things are getting better?

1. Easing Monetary Policies outside US
US Policy makers are expected to shift their support away from the financial markets as the economy rebounds. Compared to the rest of the world, US is one of the few countries that is facing “full employment”. To turn things around, countries outside of US are expected to loosen their monetary policies.

Source: Federal Reserve Interest Rates, TradingEconomics

This leaves the US economy in a unique position as it diverges with the rest of the world. Major economies outside of US are not doing well; Japan has recently slipped into recession while Europe continues to struggle. It can be expected for these economies to introduce more stimulus to the market such as quantitative easing (QE). This will lead to strong growth for these markets compared to the limited growth in US.

2. Limited Upside for US Firms
US stock market has been in an extended bull run after stimulus with QE by the Fed and record low interest rates. Companies in US have been seen struggling with earnings growth in the recent earnings release. With limited growth, there is a cap on the upside of US firms.

Source: 5 Year Chart of Dow Jones Industrial Average, TradingEconomics

It is a different case for overseas companies, whose earnings have been weak for a period of time. As compared to their counterparts in US, overseas companies are trading at a lower valuation as weakness in their economy prevails. Stimulus by overseas policy makers will assist the growth in these companies, giving them a high potential upside.

3. Bottoming Commodities
Commodities prices play a huge role in many economies that are reliant on them; especially emerging economies. The slump in commodities prices was partly due to weaker consumption from China, its main consumer, and also the world’s largest construction market. Compared to its high in 2011, the fall in prices was so bad that the Reuters/Jefferies Commodity Research Bureau Index recorded a drop of nearly 50 percent.

Source: 5 Year Chart of Thomson Reuters/CoreCommodity CRB Commodity Index, Bloomberg

The most heavily affected commodities are industrial metals and precious metals. For instance, iron ore fell so hard that its 2011 price is four times higher than its price today. Since the fall of prices in 2014, commodities seem to have been stabilising and showing signs of bottoming.

James Liu, Market Strategist at J.P. Morgan Funds believes that commodities will rebound next year. This is perhaps a sign that emerging economies and those that are reliant on commodities are also recovering.

According to a report by Global Construction Perspectives and Oxford Economics, China’s construction growth, after hitting historical low in the short term, is expected to make slight recovery in the years leading up to 2030.


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