Change of Heart: U.S. Trumping Emerging Markets as Investors Seek Stability


The political and economic conditions in developing and emerging economies are continuing to take their toll on companies exposed too heavily to these markets. Meanwhile, investors who opted to make plays into U.S. equities, especially during the earnings season, were rewarded as many firms in that sector have provided solid financial metrics and some amount of certainty to investors in a very uncertain world.

Protests in Brazil, currency destruction in India, and the slowdown in China are punishing businesses highly leveraged in these markets, especially firms like Yum Brands (NYSE:YUM), which depends on China for around roughly half its sales.

China is undergoing a period of economic restructuring as its communist leadership takes on more pro-market reforms while trying to create better quality and more sustainable growth moving forward. Still, these reforms have been marked by a slowdown in growth, as the state-controlled economy always seems to need one more reform.

A leaked document shows that political tensions are growing, as could social unrest, with Chinese leadership appearing fearful about its current position. According to The New York Times, a government memo leaked to the press reports seven concerns the government is coping with and promises scrutiny of the party now that its grievances are out in the open.

For investors, this should signal some warning signs that despite market oriented reforms implemented by the government, that serious hesitation, or even outright resistance exists there, and that for the foreseeable future, China’s economic direction is anything but certain.

Meanwhile, the U.S. is politically stable — if only by global standards — and despite a largely ineffective Congress that consistently polls abysmally, hiring is picking up slowly and firms are doing well. All this has led to a turnaround of the investing climate, in which investors spurred on by quantitative easing took risks in exotic locales across the globe. Now, American companies are cashing in.

Andres Garcia-Amaya, a global market strategist at JPMorgan Chase & Co. (NYSE:JPM), told Bloomberg Businessweek that the price to be paid for comfort is all right in her books.

“Earnings have delivered and there is more certainty going forward,”  she said to the publication. “I’m OK paying up for more certainty, rather than having cheaper valuation while having a lot more uncertainty.”

As quantitative easing faces its potential demise, Europe seeks to escape recession, and the BRIC economies perform marginally, investors like Garcia-Amaya are happy to keep their money at home. The result is that $95 billion has been flushed into exchange-traded funds for American shares, while similar ETFs for the developing world have been liquidated at about $8.4 billion in value, according to Bloomberg Businessweek.

So until the rest of the world shows the political competence needed to move forward with growth and sound economic policy making, the U.S. could be the haven du jour for some time to come.

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