As one looks back on the financial and economic conditions in the past couple of years, there is a sense of relief in regards to the prospects of 2013. I believe that this will be a better year for the economy, but probably a more challenging year in politics around the word.
The USA continues to be in the muddle-through mode, meaning that it continues growing, albeit slowly. Industrial production in the USA expanded at a rate of 2.2% last year, above all other major developed countries except for Germany. Europe and Japan are coming out of recessions. From the investor’s point of view, Europe is almost back to normal; interest rates for Spain, Italy, and Portugal are coming down, those who hold Greek assets believe they will be paid in Euros, and nobody is expecting a breakup in the common currency. China has been growing again, and even if stays below, the rate in the last couple of years is still about 7%.
Those who read my newsletter know that I have been very optimistic in regards to the USA and particularly about investing in the US stock market. To be sure, if you had bought the SPY in January 2012 (the index that tracks the Standard and Poor) you would have made 16% through the year. Although last year was a risk on-, risk-off year, a year driven by the crisis in Europe and the fear of another financial crisis, whoever had the capacity to ignore the noise fared well. Most investors decided to stay on the sidelines, though, waiting for a moment to jump in. That moment has come and gone several times. Now investors are coming back and in the last month more than 9 billion dollars returned to mutual funds.
As I see, the main drivers of last year volatility are not so pronounced anymore: as I mentioned before although Europe is not out of the woods, is in a much better place; the American election has passed and so has the fiscal cliff. Now the republicans just decided to give another break to the markets and committed to increase the debt ceiling for 3 months. Let’s see if they get the votes to approve. Of course they are kicking the can down the road. For investors this is good news. The earnings announced in the last quarter were not spectacular but were not bad also. The earnings being announced this month are following the same pattern. Some sectors are performing well and as I showed in previous newsletter, earnings in sectors linked to the housing market confirm that this segment is recovering and everybody knows how important this is for the economy.
Obama starts his second presidency more mature, knowing better how to deal with the challenges. He also is more powerful, even if some do not believe that. Recent polls showed that 70% of Americans like him and his rate of approval is 53%, while the rate of approval for John Boehner, the speaker of the house, is only 18%. It is true that the Republicans still hold the House, but, in fact, they got a minority of votes nationwide in house races and it was the changes in the division of the electoral districts that gave them a majority. Obama had a bi partisan vote on the tax raise and Sandy relief and will probably have a bi partisan vote on immigration, budget and sequestration. Obama has also decided to bring every battle to the public and so far he has succeeded in the ”blame the Republicans” narrative.
As a President or, for that matter, any other executive, you start with big plans and an agenda. Things happen along the way that make you change your priorities. For instance, the debate about guns was never present during the campaign and now is a priority for Obama. This brings me to the current geo- political tensions.
As I said, I am very optimistic for 2013 and think every investor should be in the stock market. However, there are clouds looming over the horizon, and Obama will have to change his approach on foreign policy. The US has been focused on the domestic issues and has ignored what is going on in the rest of the world. The Middle East is collapsing and also is North Africa. Every day a crash between Israel and Iran seems more probable. Then there is Syria, locked in a civil war where the anarchy could contaminate Lebanon and Iraq. China and Japan are escalating in the dispute for the islands (called Diaoyu by the Chinese and Senkaku by the Japanese) and there are Chinese and Japanese military fighters in the air, increasing the risk of a conflict.
As optimistic as I am about the US, I cannot say the same about Brazil. It is upsetting to read the Brazilians newspaper and headlines such as “majority of physicians are incapable but will practice medicine” or “Dilma used gimmick to meet fiscal target” or “Dilma increases formation of estate companies”. Glancing at the first page of Folha de São Paulo and seeing Jose Genoino’s picture in his first day in the Congress, after being convicted by the Supreme Court in the “mensalão” scheme is just sad.