The current economic downturn has been called a housing crisis, a financial crisis and a debt crisis, but now, according to nearly everyone running for office, we are in a jobs crisis. Politicians currently talk of vague jobs plans, filled with serious-sounding phrases and little real meaning.
Think about it, when has a corporate CEO ever been rewarded for hiring people who aren’t absolutely required. Most companies hire only when its workforce can no longer keep up with the demand for its products.
The government’s ability to create jobs is pretty disappointing and that’s ok. The most popular types of jobs programs involve state tax breaks or subsidies that seek to move a company from one state to another. These policies don’t add to overall employment so much as they just shuffle jobs around.
John Maynard Keynes’s view is that government can create jobs by spending a lot of money. The stimulus, however, has to be borrowed, and it has to be huge — probably something close to $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels.
Many Republicans follow the more fiscally conservative University of Chicago School, which argues that Keynesian stimulus can’t heal a sick economy — only time can. Chicagoans believe that economies can only truly recover on their own and that policy interventions only slow the recovery.
Of course, Republicans can’t say, “wait this thing out while we cut taxes and regulation.” These policies may make the economy healthier in 5 to 10 years, but the immediate impact would require firing a large number government workers.
The U.K., as part of its austerity measures, is in the process of firing about 500,000 government workers under the notion that the private sector would expand (lower taxes and regulation) and employ all those laid-off. But this isn’t happening. The British economy continues to grow slowly, if at all and few government workers have found new jobs in the private sector.
The second area of agreement is the most important: an economy is truly healthy only when its people know how to make and do things that others will pay them a decent amount for. Jobs are not the cause of a healthy economy, they’re the product.
The economy that emerges from this recession is going to be different. Without the distortion of a credit bubble, it is clear that far too many Americans don’t know how to do anything that the world is willing to pay them a living wage for (Kardashians excepted).For confirmation, look to the aptly named rustbelt and also look at the negative correlation between education and unemployment.
An economic downturn is the time to learn new skills – move forward and learn about something that can help produce a paycheck. Those who can’t find a job where they live should consider moving to places where there are more jobs than applicants.
With Europe plugging the nearly insolvent country dyke that seems to spring a new leak every six months and until the U.S. economy, somewhat mired in mud, gets unstuck, emerging economies will be a beacon to investors.
Take for instance, The Matthews Asian Growth and Income Fund, the Fund invests in dividend-paying common stock, preferred stock and other equity and convertible securities of companies located in Asia – it’s paying a 3.4 percent current dividend. Investors are becoming increasingly aware of the attractive demographics and strong economic growth that exist in the region.
Over the last 15 years the Fund has delivered risk adjusted performance (alpha) of 7.24 percent ABOVE the index. And during this period of economic volatility, the Fund was able to accomplish one of its main aims—to offer a degree of downside protection—and cushion shareholders from the worst of the sell-off.
To index is smart when the market is terribly efficient. Managers cannot consistently outperform in highly efficient markets as prices instantly change to reflect new public information. This is true of the Treasury market and may be true of the domestic large cap stock market. In inefficient markets a good manager can exploit this to the shareholders advantage. Small cap stocks and emerging markets currently fall into this category. Indexing in these markets may not be as profitable over the long-term.
CBlakely CFP®. CTFA 11/2011
Sources: PlanetMoney – Adam Davidson, Bill Gross-PIMCO, Matthews Asia
Showing posts with label international investing. Show all posts
Showing posts with label international investing. Show all posts
Thursday, November 10, 2011
Friday, October 7, 2011
Before Investing in Foreign Stocks, Read This!
It is generally not advisable to hold foreign dividend-paying American Depositary Receipts (ADR's) in IRAs and other non-taxable accounts since you cannot recover the taxes paid to a foreign country.
However, there are two notable exceptions. First, Germany charges a 26.4 percent tax on dividends on stocks held in taxable accounts. But due to the tax-treaty between U.S. and Germany, Germany does not deduct any taxes on dividends paid by German firms to U.S. investors who hold the stock in their IRA and other qualified pension accounts. Second, Canada charges a 15 percent tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15 percent tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold stocks in say Canadian banks such as Royal Bank of Canada or other Canadian dividend-paying stocks in your IRA’s for the long-term without worrying about taxes on dividends.
The Netherlands has a statutory tax rate of 25 percent. But due to the special tax treaty with the United States, American investors in Dutch companies are charged only 15 percent. The following countries have tax-treaties with the U.S. which also allow for favorable treatment of dividends earned by US investors investing in those countries:
Australia, Austria, Belgium, China, Denmark, Finland, France, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, and the United Kingdom. This is a partial listing highlighting countries with the biggest and most developed economies.
While foreign stocks (or funds) deserve a place in a diversified portfolio, as always, consult with your investment advisor before taking investment action.
CBlakely CFP, CTFA 10/2011
Source: IRS.gov
However, there are two notable exceptions. First, Germany charges a 26.4 percent tax on dividends on stocks held in taxable accounts. But due to the tax-treaty between U.S. and Germany, Germany does not deduct any taxes on dividends paid by German firms to U.S. investors who hold the stock in their IRA and other qualified pension accounts. Second, Canada charges a 15 percent tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15 percent tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold stocks in say Canadian banks such as Royal Bank of Canada or other Canadian dividend-paying stocks in your IRA’s for the long-term without worrying about taxes on dividends.
The Netherlands has a statutory tax rate of 25 percent. But due to the special tax treaty with the United States, American investors in Dutch companies are charged only 15 percent. The following countries have tax-treaties with the U.S. which also allow for favorable treatment of dividends earned by US investors investing in those countries:
Australia, Austria, Belgium, China, Denmark, Finland, France, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, and the United Kingdom. This is a partial listing highlighting countries with the biggest and most developed economies.
While foreign stocks (or funds) deserve a place in a diversified portfolio, as always, consult with your investment advisor before taking investment action.
CBlakely CFP, CTFA 10/2011
Source: IRS.gov
Friday, September 18, 2009
Asset Allocation in a Flat World (think globally, not locally)
Global Diversification
One of the three big questions investors must consider today is: How and how much should one allocate to stocks in and outside of the U.S.? In his book, "When Markets Collide," author Mohamed El-Erian describes a multilateral economic future in which domestic demand in emerging markets is a counterbalance to U.S. growth. His recommendation is that U.S. investors be exposed to a globally diversified set of stocks, with only a third to one-half in the U.S.
If you agree, and we do, then what does "globally diversified" actually mean and how do you determine how much and where?
The difficult issue is determining a valid reference point. The obvious approach would be to start with an established benchmark as a frame of reference. A good neutral frame of reference would be the total world stock market value, except for the risk that constantly annoys capitalization weighted markets - you potentially overweight overvalued markets! A better alternative might be economic size as measured by GDP in that the weightings are not affected by short-term market momentum or overvaluations.
The total world stock market value and GDP for 2008 is as follows:
mkt. value GDP
U.S. 36% 23%
Europe 26% 36%
Asia Pacific 28% 26%
Mid East/Africa 3% 6%
Americas 4% 7%
Canada 3% 2%
Implementation
The most common approach is to achieve targeted international equity country weightings using a combination of developed international and global emerging markets strategies. Alignment with the MSCI EAFE (Europe, Australasia and the Far East) and the MSCI EM (Emerging Markets) Index will accomplish this.
These markets vary from relatively to significantly inefficient, therefore our suggestion would be to engage active portfolio managers who have the ability to create alpha (excess risk-adjusted return) consistently (keep the index funds for your short duration fixed income funds and large cap U.S. funds).
It is possible that the next ten years will bring lower correlations of international markets with the U.S., as regions like Asia decouple as they mature and become less dependent on the U.S. and continue to demonstrate growth in their domestic economies.
Christopher Blakely Sept. 2009
sources: International Monetary Fund, MSCI
One of the three big questions investors must consider today is: How and how much should one allocate to stocks in and outside of the U.S.? In his book, "When Markets Collide," author Mohamed El-Erian describes a multilateral economic future in which domestic demand in emerging markets is a counterbalance to U.S. growth. His recommendation is that U.S. investors be exposed to a globally diversified set of stocks, with only a third to one-half in the U.S.
If you agree, and we do, then what does "globally diversified" actually mean and how do you determine how much and where?
The difficult issue is determining a valid reference point. The obvious approach would be to start with an established benchmark as a frame of reference. A good neutral frame of reference would be the total world stock market value, except for the risk that constantly annoys capitalization weighted markets - you potentially overweight overvalued markets! A better alternative might be economic size as measured by GDP in that the weightings are not affected by short-term market momentum or overvaluations.
The total world stock market value and GDP for 2008 is as follows:
mkt. value GDP
U.S. 36% 23%
Europe 26% 36%
Asia Pacific 28% 26%
Mid East/Africa 3% 6%
Americas 4% 7%
Canada 3% 2%
Implementation
The most common approach is to achieve targeted international equity country weightings using a combination of developed international and global emerging markets strategies. Alignment with the MSCI EAFE (Europe, Australasia and the Far East) and the MSCI EM (Emerging Markets) Index will accomplish this.
These markets vary from relatively to significantly inefficient, therefore our suggestion would be to engage active portfolio managers who have the ability to create alpha (excess risk-adjusted return) consistently (keep the index funds for your short duration fixed income funds and large cap U.S. funds).
It is possible that the next ten years will bring lower correlations of international markets with the U.S., as regions like Asia decouple as they mature and become less dependent on the U.S. and continue to demonstrate growth in their domestic economies.
Christopher Blakely Sept. 2009
sources: International Monetary Fund, MSCI
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