Learning From the G20 – Investment Guidance for Markets Over the Next 6 Months

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Now that the G20 has wrapped up, what can we glean about stock markets going forward?  Canada’s PM Harper noted that markets have been skittish as they have been waiting for the G20’s pronouncement on the delicate balance between imposing fiscal austerity but also facilitating continued stimulus in order to abet the global economic recovery.

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 Two major developmental points remain to be passed before I think we can expect another leg in the recovery rally.  The first concerns the financial sector: we need an update on the Basil Accord for capitalization regulations for banks.  Canada’s banks in particular are already over-capitalized, waiting to raise their dividends, but they’re still waiting to see what Basil 2 will demand in terms of capital requirements.

The second checkpoint to pass is the November 2010 mid-term elections in the U.S.  Although it is primarily of political relevance, markets will be relieved to be able to pass over any uncertainty about financial reform and political leadership.  As they say, markets can handle the good and the bad in news, but unknowns give it major problems.

And now the G20.  Harper has won agreement on his compromise between deficit reduction and fiscal stimulus.  Initial drafts of the official communique show that the G20 has agreed to try to halve deficits by 2013, although each country will be able to determine its own way of meeting that goal.  In addition, debt-to-GDP ratios will seek to stabilize by 2016.

What I think this indicates is a bit of a concession that the coming and continued decoupling of world economies is going to continue.  The U.S. and possibly France, UK and Germany will impose their own bank taxes (there will be no global bank tax, thanks largely due to Canada’s Financial Minister’s vocal arguments against it), and the U.S. will be largely charting its own course to recovery.  Countries like Canada, China, Brazil, Australia and Indonesia are already well onto the recovery ramp, if not off it completely.

The growing prominence of the G20 itself, which includes such nations as Saudi Arabia, Indonesia, China, Brazil and South Africa, shows the growing importance of emerging markets, which we knew already, of course, but now they are a solid part of world governance.

Developments such as these, following the 2008-09 U.S. financial collapse and the Beijing Summer Olympics, seem to indicate the implicitly acknowledged acceptance that the U.S. is no longer the main engine of global economic growth; it is no longer the centre of global power (there are other developing centres) and it is no longer the loudest cultural voice.   For most nations around the world, these are welcome developments.

Your investments should reflect this.  Stick with U.S. multinationals with good earnings growth, sure – but look to the markets of the nations with real growth in consumer demand and manufacturing development going forward.  Get to know names like Telefonica (NYSE: TEF) and MercadoLibre (NASDAQ: MELI).

Expect markets to rally a bit in the week following the G20, especially if there is no further negative news concerning sovereign debt in Europe.  Further expect some sell-offs going into this rally as much profit-taking occurs by those expecting a double-dip.

Then we just need to wait it out for the September-October-November season of stock market turbulence before I think we can expect another nice rally upwards.  By that time, strong economies will be even stronger and there will be less looking backwards.

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