On October 6
th, Australia became the first in the Group of Twenty nations to raise interest rates. The surprise move signals that in some parts of the globe, the period of monetary loosening which began during last year’s market debacle is beginning to reverse.
This shift is significant for a number of reasons. First, it illustrates that economic growth is not uniform. Commodity-based economies such as Australia and Canada are pulling away from the rest of the world, and mostly avoided the banking problems that the U.S. is still trying to unravel.
Emerging market economies such as Brazil, South Korea, and China are also experiencing greater than expected growth. These countries, which are not burdened by large government spending programs, are enjoying increasing interest by stock and bond investors.
Most of the buying of foreign investments is predicated on the concept of a domestic economy that holds less sway internationally. Indeed, based on both economic and population growth, emerging market countries are expected to out-consume the U.S. by 2011. The following year, developed world gross domestic product is expected to be eclipsed by emerging market GDP. Fiscally, debt as a percentage of GDP in these countries is only 6%, compared to 13% in the U.S. The combination of greater growth and a healthier balance sheet make a strong argument for increasing international diversification.
Ben Warwick (ben@qesinvest.com) is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.
See More of Ben Warwick’s Portfolio Diagnostician Blog Posts
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