Around the World and Back

By Ralph W. Cole Senior Vice President of Research

Around the World and Back I had the opportunity last week to travel to Hong Kong and Mumbai and meet with investment industry experts. Both economies appear to be improving, or at least, bottoming.

The Chinese have a fascinating process of selecting their new government leaders. While jockeying goes on for years in advance, the final selection process takes approximately a week behind closed doors. The announcement is made as the new regime takes the stage in The Great Hall of the People in Beijing. The country is literally waiting and watching to see who comes out on to the stage, and in what order. The seven members were led by Xi Jinping, who is the new President. Xi Jinping is viewed as somewhat of a reformist, but overall the seven member group is viewed as conservative, and reforms will continue at a slow pace. This selection process takes place once every ten years, which allows the Chinese government to be a little more strategic than ours here in the U.S.

As we all know, democracies can be messy, and while India’s is messier than most, they are making real progress. In the last couple of months India has passed pro-growth initiatives including: companies’ bill for improved corporate governance, and the allowance of foreign direct investment in aviation, multi-brand retail, insurance, broadcasting and power exchanges. Management teams in these industries will improve profitability, but more importantly, drive infrastructure improvements throughout the country. Several more government actions are expected to take place in the coming quarters.

Man Bites Dog The International Energy Agency said the U.S. will overtake Saudi Arabia as the world’s leading oil producer by 2017 and become a net exporter by 2030. The IEA went on to say that natural gas will surpass oil as the largest fuel in the U.S. by 2030. We have written extensively about the shale oil and gas revolution ongoing in the U.S., but even we were surprised by this headline. We will continue to weave this theme throughout client portfolios in the coming years.

Anyone Tired of the Fiscal Cliff yet? The President and Republicans have begun jockeying on the fiscal cliff and long-term fiscal reform. Having won the election, the President is pushing for higher tax revenues of $1.6 trillion over the next ten years. This is double the $800 billion that was almost agreed to last year during the debt ceiling debate. The President appears to be going “all in” on his populist platform, but the Republican House will be the key check on his ambitions. We hope that the initial salvo from the Oval Office is only a negotiating technique, and both sides can come to a reasonable agreement. The S&P 500 finished the week down 1.36 percent and the 10 year treasury yield drifted lower.

Our takeaways from the week

  • Political and economic reforms occurring in India and China should make the countries more attractive to investors
  • Market volatility will likely continue as long as lawmakers debate solutions to the fiscal cliff