It’s been a very interesting year so far, and things may just be getting started.
After a wonderful 2017 and early 2018, global markets got pummeled in February as the trade war bluster started to brew. Markets around the world plunged. While the US market has since recovered – largely we think because at the end of the day the US has the upper hand in world trade – other markets are mostly just coming around. Japan for instance – which we have a big piece of in our Offshore and Capital Appreciation AIMS™ portfolios – recently hit highs not seen in decades.
As you know, many Camarda portfolios have large allocations to non-US investments, which have faltered for much of this year largely due to trade uncertainty. We think this is temporary, and once trade is normalized these markets will come roaring back, and probably surpass the US markets. The reason is non-US markets are still very cheap, and the US market is trading at rich valuations which may not be sustainable over the midterm. It’s like having identical houses in two very similar neighborhoods with the same schools and everything. At a given instant in time, one house – the “US house” – is selling for top dollar, let’s say $800,000. The identical house – the “international house” is selling for only $550,000. Smart investors – who also have to be patient – would sell the US house and buy the international house.
On top of this, the US dollar started to rise, largely because rising interest rates here attract capital from other countries. Since investors have to buy dollars to get them, this drives up demand and prices for dollars and reduces the relative value of the other currencies non-US stock markets are priced in. Until the dollar goes down – and it has a little bit lately – investments in non-US markets look worse than they actually are because of this dollar effect. On the other hand, a strong dollar makes these markets even more of a bargain in our view. It is important to note that when the dollar trend eventually reverses – as it almost certainly must – this currency effect will give an added kick to US investors’ returns, so long as they stay invested long enough to see it.
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