Investing is now more challenging after a period where the Magnificent 7 drove markets forward and a decade in which the world was awash with cash and U.S. markets dominated the stock return tables.
What has changed?
5 Factors Driving the Market’s Global Rebalancing
· Once awash in liquidity with low interest rates, benchmark interest rates are creeping up to levels that are making equity and bond markets a bit jittery. Both 20- and 30-year U.S. Treasurys have traded above 5%. Japan has also seen long-term government borrowing costs rise.
· Persistent U.S. budget deficits, with mounting national debt as half of publicly held Treasurys – about $14 trillion of federal debt – will soon mature and need to be refinanced at higher rates. Higher bond yields mean higher interest bills, and in turn, more debt and more inflation.
· A dysfunctional U.S. Congress is beginning to impact U.S. Treasury bond markets as well as the value of the U.S. dollar. This reflects and is resulting in more capital flowing out of dollar assets into international bonds such as Japan or even the 10-year Indonesian sovereign bond, offering a 7% yield.
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· Inflationary pressures seem stubborn as the U.S., China, and other countries try to reduce imports and become more self-reliant, leading to higher prices.
· The imposition of tariffs and retaliatory tariffs has thrown sand in the gears of the global economy raising economic uncertainty and risks. It is still unclear whether the global rush toward non-U.S. assets that quickened earlier this year is the beginning of a trend.
Recently, the House passed and sent to the Senate its massive 1,000-page tax-and-spending bill after party leaders made a series of last-minute changes. The vote was 215 to 214. In the middle of an economic expansion, with a large structural annual deficit of $2 trillion, this is deeply irresponsible. It is also expected to add at least $3.3 trillion to the deficit by 2034 while raising the country’s debt ceiling by $4 trillion.
This explains the timing of the credit ratings firm Moody’s downgrading the United States a notch. This means it is no longer “top tier” credit-wise by the standards of any major agency.
This reflects concerns about the compounding effect of higher debt leading to higher interest rates leading to higher debt could spin out of control unless Washington shows more discipline.
The key psychological inflection point appears to be 30-year Treasury bonds at or above 5%.
As I have been pointing out, this is happening at a point where foreigners own about 30% of outstanding U.S. Treasury bonds and roughly 20% of U.S. stocks.
The weakening of the U.S. dollar especially impacts foreign investors, but this is unlikely to threaten the greenback’s reserve status since central banks hold almost $7 trillion worth of dollars in reserve, almost three times as many euros as they hold. Furthermore, the $28 trillion Treasury market is the world’s largest and most liquid. In comparison, there is only $1.4 trillion in German government bonds outstanding.
Japan is another high-debt country to watch. Japan must now finance government debts two-and-a-half times the size of its GDP. The price of its 40-year government bond is down about 25% since August and made a new low recently.
The tariff issues add to uncertainty since by some estimates, average U.S. rates on Chinese goods are roughly 33% and 18% overall, putting pressure on prices.
But as I will point out during my upcoming June 12 webinar with Cabot’s Editor-in-Chief Chris Preston, economic security and technology issues are at the heart of the U.S.-China relationship. This means intellectual property theft, cyber espionage, forced technology transfer, dual use risks, supply chain chokepoints, nontariff barriers to U.S. firms and currency manipulation.
4 Multinational Stocks to Avoid
Stock picking will now be at a premium across advanced technologies, including AI, biotech, quantum computing, and in critical minerals.
What are the best safe havens?
How should I organize my portfolio?
What stocks should I buy now?
What countries should I invest in for diversification?
How can we continue our efforts to protect assets through portfolio rebalancing while remaining alert to trading opportunities?
One likely group that will suffer are American multinational stocks. A considerable number of these consumer giants, such as Nike (NKE), Tesla (TLSA), Intel (INTC) and Starbucks (SBUX), have over 20% of their sales revenue coming from China.
The American market now represents only about 14% of Chinese exports and China’s roughly $20 trillion economy will be hurt but able to adjust to a loss of some of the $550 billion in exports it sent to the U.S. last year.
Tech products are caught in the crossfire as Cornell University reports that 73% of smartphones, 78% of laptops, and 87% of video game consoles sold in United States come from China.
Chinese stocks are outperforming this year, and many have little international exposure, such as Luckin Coffee (LKNCY) and Chinese automakers like BYD (BYDDY) which sell virtually no cars in the United States.
Tech service-oriented stocks escape the input and hardware risks.
Financial service companies will also likely avoid tariff issues, such as American Express (AMEX) and Visa (V).
China is also pushing back by restricting rare earths. Chinese state-owned companies have taken over all foreign-owned rare earth refineries in the country and have designated their techniques around rare earth mining and refining as state secrets.
Turbulence creates both risk and opportunity. Are you ready?
Again, I’ll have much more on the U.S.-China rivalry – and the high-upside investment opportunities it creates – in my June 12 webinar titled, “U.S.-China Trade War: 3 Stocks to Grow Your Portfolio Now.” Click here to sign up now. It’s FREE!
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