Do you expect growth and sustainable earnings from international companies?
Sustainable, responsible growth requires lots of things to go right. It also requires thoughtful, strategic vision and superior management when things change.
There are many variables within the control of a company to create their own success:
- the clarity of your strategic vision
- the quality of your good or service
- the culture of innovation in your company
- the quality of your workforce
- the training and indoctrination of your employees
- the ability to clearly explain your mission and strategy to your employees and how they can contribute
- the experience of your customers with your good or service
There are also many forces outside of a company's control:
- the economy at large
- the tax system of your company’s domicile
- the availability of natural and people resources that feed your business
- a strong healthy customer base to buy your good or service
- the stability of the country you operate in
Why would an investor expect sustainable growth from their investments when the policies that have created the environment we invest in is completely non-sustainable?
We live in a dangerous world where instabilities are proliferating and the forces outside the control of the global corporate machine are large and intimidating.
❖ Almost across the globe, developed countries have embraced a fiscal posture to create money and spend on an unsustainable basis, which has a short-term and long-term effect. On the short-term basis, the economy becomes dependent on the steady flow of capital throughout the economy. On a longer-term basis, the public debt load overwhelms the economy and cannot be repaid.
❖ The Middle East has just become exponentially more dangerous as we have a U.S.-armed Taliban that can move freely across Afghanistan and quickly into adjoining countries, most assuredly making the entire Middle East a more dangerous place.
❖ The Delta variant is proving to be too contagious to contain in the short run. While it will likely hasten our move to herd immunity, it will also certainly put a short-term muzzle on growth around the globe.
❖ As the U.S. has made responsible economics and our foreign security a secondary concern to the coronavirus and social equity concerns, the country's financial dominance, strength and security is being threatened and opening the door for our potential foreign competitors to gain ground. China may be emboldened to expand its control in Asia with a move against Taiwan while Russia may feel equally emboldened to move on Ukraine. Why not make your big moves when the U.S. is distracted and has non-unified leadership?
❖ We now have most of the developed countries around the globe with non-sustainably high debt-to-GDP ratios that leave little room for maintaining their current policies. There will likely be a large economic vacuum when these countries are all forced to change policy.
❖ Emerging markets with debt-issuing capabilities have also followed the lead of developed economies and have taken on large debt loads. There will likely be some serious defaults that will cascade to affect much more than some small economies.
After watching the swiftness of the collapse of a “free” Afghanistan, investors should wake up, take heed and recognize how quickly their investment assumptions can be completely obliterated. There is so much out of your control and so many chaotic forces at work today.
Risk is always a non-linear problem but rarely are there so many forces at work that could make the current market environment mean nothing one week later. This is a time for caution in your portfolios.
Disclaimer
This message is for investors with more equity exposure than they are comfortable with. It is not a recommendation to liquidate your entire portfolio and pay capital gains. It is a note of caution to those believing they can exit in front of the next down leg.