Three months ago when I sat down to pen the last quarterly letter, Greece dominated the headlines. Today almost nobody asks me, “What do you think about a Grexit?” As usual, the lesson is that what the media wants to talk about does not have an enduring impact on your portfolio.
As I write this letter I am tempted to comment on what the Federal Reserve might do in the months ahead or on recent Chinese economic and financial market developments, but I am not going to do that. Instead, I want to remind you that even if the Fed acts in 2015 the global economic backdrop remains largely unchanged. Let’s review the major trends. First, inflation has slowed over the last 30 years. In 1980, 92% of countries had inflation over 5%, today only 31% have inflation over 5%. Second, the world is more interconnected than ever before. How do we measure that? We look at exports as a share of global GDP. In 1914, at the peak of the previous era of globalization and on the eve of the First World War, exports’ share of GDP was 16% whereas today it is 32%.
So what does all of this mean for your portfolio? Low inflation and slightly slower growth imply low global interest rates, all else equal. Both shorter- and longer-term government bond yields are low, and will likely remain low, regardless of what the Fed does in the next few months. Further, the more globalized the world becomes, the more synchronous the economy. Sure, we can tell you that only 1% of U.S. GDP is generated from exports to China. However, in a hyper-globalized world, we are truly all in it together, and a slowdown in one country or region can reverberate worldwide. Even Federal Reserve officials admitted as much at their September meeting.
I’ve witnessed one of the greatest economic development stories in history with the transformation of the global economy over the last 30 years. I suspect some opportunities will present themselves as investors adjust to the next phase of global growth.
How does this translate into returns over the next few quarters? In the near term, it is likely that we will experience low single-digit returns. Looking a bit further ahead, a pick-up in the global economy will present opportunities domestically and abroad. The world is positioned for growth over the next decade, and we are cautious but optimistic, focusing our investment philosophy on providing diversification and flexibility for our clients.
Best wishes for the autumn,