Buy American Stocks
U.S. investors don’t give our country much respect. We wring our hands about huge budget deficits and high unemployment and worry that America is losing its place as the world’s top economic power. We’ve been bailing out of U.S. stock funds in droves for several years now.
The doomsayers are dead wrong, says Richard Bernstein, a longtime Merrill Lynch strategist who left to open his own investment business three years ago. “We’re in the early stages of a long period of outperformance for U.S. assets,” he says. “When people voice fears about the dollar or the deficit, they’re forgetting that things are actually much worse outside the U.S. Think of the U.S. as the smartest kid in summer school.”
Most of our troubles are behind us, Bernstein says. Employment is improving, households have paid down debt, and small banks, at least, boast strong balance sheets. The housing decline is over. Says Bernstein: “The credit bubble was not a U.S. event; it was global. The question is, which country is still in crisis because of the deflating of that bubble? In relative terms, the U.S. is a stable place to do business.”
Bernstein sees most of the developed world and emerging markets as “value traps.” Their stocks look cheap, but they’re not because those regions are still suffering badly from the collapse of the global credit bubble. When the fundamentals are awful, stocks that may look cheap on the surface have a way of becoming even cheaper.
Bernstein points to analysts’ earnings estimates to buttress his argument. On average, analysts project earnings for Standard & Poor’s 500-stock index to grow 10% in the coming 12 months. Earnings of European companies are forecast to grow 9.5% and those in emerging markets a surprisingly modest 9.1%. The world’s fastest growing sector: small U.S. companies. The Russell 2000, a small-company stock index, is expected to see earnings growth of 26%.
Europe, he says, will remain mired in crisis for a long spell. Bernstein predicts that a solution will come only when German banks start getting into trouble. Japan, meanwhile, has been in a bear market for decades, and he sees no improvement on the horizon.
Few argue with Bernstein’s concerns about the developed world. It’s on emerging markets that he parts with the crowd.
He thinks that a plunge in demand for commodities will hurt developing nations that are powered by natural resources, such as oil and iron. In particular, emerging nations have been hurt by a drop in demand for building materials. As for China, it experienced its own credit bubble, which is only now beginning to pop. China’s problems will ripple across Asia.
Any notion that the economies of emerging countries can remain independent from the developed world is nonsense, says Bernstein. “Emerging markets haven’t decoupled,” he says. “They’re more coupled than ever.” So far this year through June 11, the MSCI Emerging Markets stock index has risen 1.4%; it tumbled 18.2% last year.
As emerging-markets stocks have declined, they’ve gotten cheaper. Indeed, the MSCI Emerging Markets index currently trades at just 11 times analysts’ estimated earnings for the coming 12 months. The developed world -- essentially Europe and Japan -- also trades at 11 times earnings. But cheap multiples are worth little if earnings are falling. The S&P 500’s price-earnings ratio is 13, higher than other parts of the world but still reasonable.
Bernstein, who runs Richard Bernstein Advisors, in New York City, has 80% of the stock money in his global portfolios in U.S. stocks and less than 5% in emerging markets. Stocks of small companies account for 15% of his stock investments.
For diversification, Bernstein advises, hold your nose and buy some U.S. Treasuries despite their microscopic yields. Why? “They’re the only assets that rise when stocks fall nowadays.”
Is Bernstein right? A quick solution to the euro zone’s crisis seems unlikely (see U.S. Stocks and Bonds: Best of a Bad Lot?). A slowing in demand for commodities, coupled with increasing supplies of oil and gas, seems likely to hurt emerging markets, such as Russia, that depend on commodities.
But I’m still a believer in the emerging-markets growth story. I don’t think China is about to run off the rails. I think small-cap stocks are overpriced. And I wouldn’t touch Treasuries. Even if you don’t ultimately buy Bernstein’s argument, though, it’s a provocative one. If you think he’s right, your plan of action is simple: Buy American.
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Download the premier issue for free.