In the midst of the current financial turmoil, how do I see equities in the 2-5 year horizon? While most would bet that the Emerging Markets will do better than the developed markets of US and Europe, I wouldn’t be so sure on this.
Sovereign funds, for example the likes of Temasek, have been starting to materialise for many countries. The government of these countries typically have a large reserve of foreign currency exposure invested in low risk assets such as bonds. However, they look to increase their risk appetite by forming this funds to take more risk and invests in foreign assets that generate higher returns. Temasek’s model was so successful that now China, the middle east countries and Norway have such funds created.
Now these funds have a whole lot of potential, Firstly, due to their size, they would most likely be looking to take advantage of the currency that they have to acquire the assets in the foreign currency i.e. US dollar buy US companies or land.
Many of these countries such as China and India, sells their exports to US, so they have accumulate a whole lot of USD. Now, the US may not have much alternative but to devalue their currency so that their stock market will not be sacrifice instead.
Which would be better to hold on to? Fiat paper or a solid business that has global cashflow? I think the answer is obvious.
Which is why i do see that much of these fund flows will be flowing back to US for some of these SP500 companies such as Intel or Johnson and Johnson, which generates most o fits cashflow from overseas. It might be the kinda push that the US market sorely needs.
Fund flows are what drives the stock market up in Asia these few years, and they have been pouring into asia. Now this is one fund flow that is gonna be interesting.
The question is that will they only buy US stocks? I would think not. US Agriculture land or land in general might be more worth it in the long run. Lets not forget that US is a pretty big piece of land and have much resources as well.
However, this would surely not gone down well with some of the US Congress, whether they would actually let all these go through in the first place.
Will this be the next asset bubble? Only time will tell.
Source: Investment Moats