Three ways for investors to catch the global tailwind in 2014
(The author is a columnist for Reuters. The opinions expressed are his own.)
By John Wasik
CHICAGO (Reuters) - There is a growing consensus that U.S. stocks, as well as stocks around the world, are going to catch a tailwind going into 2014.
Expanding economies and continued central-bank stimulus are the bellows behind this expected growth. If you do not have international stock exposure, now is the time to broaden your portfolio with these three exchange-traded funds (ETFs).
One of the best vehicles to grab growth around the world is a global stock ETF. The Vanguard Total World Stock Index ETF owns more than 5,000 stocks, but has its top holdings in mega-cap American companies like Apple Inc, Exxon Mobil Corp and Google Inc.
The Vanguard fund is up 22 percent for the year though December 6 and has beaten a world stock benchmark by about 2 percentage points over the past three and five years. The fund charges 0.19 percent for annual expenses.
If you do not want a portfolio dominated by U.S. blue chips, then consider the iShares MSCI Emerging Markets Index ETF. The fund invests in an index of companies in developing nations and holds stocks like Samsung Electronics Co Ltd, Taiwan Semiconductor Manufacturing Co and China Mobile Ltd.
Charging 0.69 percent for annual expenses, the iShares fund is up 0.21 percent for the year through December 6 and has averaged more than 15 percent annually over the past half-decade.
For a more Euro-centered focus, consider the Vanguard FTSE Europe ETF, which owns established European companies such as Nestle SA, HSBC Holdings PLC and Roche Holding AG. The fund has gained nearly 23 percent for the past year through December 6 and charges 0.12 percent annually for expenses.
THE GROWTH OUTLOOK
Although recovery has been sluggish since the financial meltdown of 2008, economies in the United States and abroad seem finally to have found solid footing.
According to S&P Capital IQ, "the global expansion is seen ramping up as 2014 progresses, with growth forecast to reach 3 percent by the fourth quarter, up from 2.6 percent in the first quarter."
Some of the bright spots include Europe and China. An aggressive stimulus policy by the European Central Bank has buoyed some of the hardest-hit economies, such as those of Spain, Italy and Greece. Fears that the Euro Zone would buckle proved premature.
The European Central Bank, echoing the U.S. Federal Reserve's post-2008 actions, lowered its benchmark rate to 0.25 percent recently. The Euro Zone economy is also aided by low inflation, running under 1 percent annually.
There is even an argument that European stocks are undervalued relative to the United States, according to StarMine analytics, a Thomson Reuters unit. While U.S. companies have benefited from a slowly growing economy, increasing employment, low inflation and interest rates, the Euro Zone is just now climbing out of recession. There may be more bargains relative to the U.S. market.
In China, where many analysts had feared a "hard landing" as growth slowed, the country's economic growth rose, expanding at a 7.8 percent clip in the third quarter - up from 7.5 percent in the second quarter. The country is expected to lead all world economies at a forecast 7.4 percent growth rate in 2014.
Despite the improving economic climate abroad, all eyes will be watching the Fed in Washington. When will the central bank pull back its $85 billion-a-month bond buying program? That will depend upon how much U.S. employment improves; the Fed has set a benchmark of a 6.5 percent unemployment rate as a trigger for possible changes.
With the job market improving - as witnessed in Friday's employment report for the month of November - traders are nervous that the Fed will ease off its stimulus program, which has partially fueled the stock rally.
The Fed's eventual braking of its stimulus plan would likely raise the value of the dollar on foreign exchanges, which would hurt the shares of non-U.S. stocks denominated in foreign currencies, which is a perennial risk. That could also spark a withdrawal of investment in developing markets.
An even greater risk, according to Bill Gross, managing director of PIMCO, which manages nearly $2 trillion, is that "overlevered economies and their financial markets must at some point pay a price, experience a haircut, and flush confident investors from the comfort of this Great Moderation Part II," he wrote in his most recent PIMCO newsletter.
Until that happens, profit growth in the United States and abroad will propel continued stock price gains. That is why it still makes sense to have at least 30 to 40 percent of your stock holdings in non-U.S. stocks.