"Kee" Points with Jim Kee, Ph.D.

The “natural resource curse”: It has been a long time since I saw any really promising data out of China, and weak export and import data from China last week add up to more of the same. Weaker growth in China has contributed to the end of the commodities “super-cycle,” which means that commodity-intensive countries no longer have the natural resource “crutch” to lean on. That, in turn, suggests that economic growth in those regions going forward (Latin America, Russia, Middle East, etc.) will require policies that facilitate production and exchange, namely (a) defined, enforceable, and transferable property rights (b) a fairly unambiguous tax and regulatoryregime, and (c) monetary credibility. None of this is easy, which is why it tends to get put off whenever resource prices are strong. But commodity cycles don’t last forever, and when they fall it has a harsh impact on these relatively undiversified economies. Hence the expression “the natural resource curse.”


Perhaps that is why stocks from Latin America (e.g. Brazil) have underperformed the rest of the world so dramatically in recent years. Looking more broadly, U.S. stocks have outperformed international stocks since the bottom in March of 2009. In fact, U.S. equities have nearly doubled the performance of other major indices (again, the worst performer being Latin America). Year-to-date, however, international stocks (e.g. Europe, Japan, China, but not LATM) have outperformed U.S. stocks. Part of this, of course, is due to the recent strength of the dollar (which hurts U.S. exporters, at least those who don’t hedge), but it could also be international multiple expansion, meaning the market is paying more for a given dollar’s worth of earnings overseas.


Here’s another way to look at it: While the U.S. economy is delivering the best growth numbers among the developed world, many international stock markets already reflect this growth disparity in the form of discounted valuations. A look at the history of U.S. versus Rest-of-World (ROW) equity performance shows distinct periods of U.S. outperformance and underperformance, as well as periods where the two are relatively neutral. Nobody can really predict these periods of differential performance, but as mentioned above, U.S. stocks have dramatically outperformed international stocks since the 2007-09 collapse. When combined with current valuation levels (i.e. “what’s priced in?”), that makes a pretty good case for looking at investments abroad as well as in the U.S. Another circumstance that favors international investing is the fact that most of the world’s major central banks are still easing and buying assets (i.e. providing liquidity), whereas the U.S. is closer to exiting such policies. Accommodative actions on the part of central banks have led to increased asset values during this recovery, perhaps by lowering risk premiums, i.e. investors paying more for a given dollar’s worth of earnings. As always, we at STMM are thinking and looking globally, but more at thecompanylevel rather than just the country level. That is, we want to take advantage of investment opportunities wherever they may be, but without relying too much on being able to forecast any specific country or region. Our international holdings will usually exceed those of pure U.S. indices (e.g. S&P 500, Russell 3000, Wilshire 5000), but will not exceed those of the global indices.