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Eurozone troubles plague markets

Saturday May 19, 2012

We had a pretty nice first quarter before April basically wiped out much of the gain for the year to date. Recently, it’s been back to volatility and uncertainty. Put the blame on Europe. The eurozone is still suffering from the debt crisis plaguing the PIIGS (Portugal, Ireland, Italy, Greece, Spain), and from the imposition of unpopular austerity measures in those countries. Greece, especially, is on shaky ground, as it has not yet been able to form a government, while the clock continues to tick on its debt time bomb, threatening the entire eurozone.

Along with Greece and Spain, France is now starting to feel the pinch as well. Germany, the strongest of the European economies, is keeping the eurozone afloat, but all is not well in the European Union as a whole. The region has a poor demographic outlook, very high unemployment (20% plus) in southern countries and very low unemployment in northern nations (3% to 5%). It’s a significant north-south divide.

The U.S. continues to struggle with a huge national debt, high unemployment, and only sluggish economic growth. Corporate America is in very good shape, but the debt problem and the poor housing market will plague the economy for years to come.

A positive offset can be found in the growth of the emerging economies, especially China with its massive size and overall importance to the world economy (currently the world’s second-largest economy after the U.S.)

The shift of economic power to the East from the West is well underway and continuing. Political power will also shift over time. The West not long ago produced about 67% of overall world gross domestic product. Today it’s close to 50%, and in 20 years will be about 33%. This means the emerging market economies will produce about 67% effectively reversing roles. That is quite incredible if you think about it.

For most of us, the West has been in the driver’s seat for all our lives. That will be markedly different for our children.

As investors, we must ensure we don’t invest like we did 10 to 20 years ago. Back then, Silicon Valley was all the rage, and the high-tech sector drove the markets. Those days are gone, and it’s long past time to shift gears, if you haven’t already done so. (Companies like Facebook Inc., which just raised US$16 billion in the biggest IPO ever for a tech company, are the exception now, not the rule.) The major fund companies have seen the light, and all kinds of new equity and fixed-income emerging market mutual funds have been coming to market over the past year or so. Check with your advisor for ways to take advantage of this new growth opportunity.

 

 

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