February 3rd, 2016
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Back To The Future: It’s Not 1997, But It’s Close
Steven Dudash, Contributor
Sometimes going back to the future happens sooner than you might think. Remember 1997? At the time, the United States’ economy was booming, while Europe stagnated, currencies plunged against the dollar, and emerging markets such as Brazil, India and Russia fell into extreme turmoil, creating a significant drag on global growth.
Admittedly, this is an imperfect analogy, if for no other reason than the U.S. economy is nearly as strong today as it was then. But consider that Asian stock markets are currently rumbling – mirroring their broader economies – and Europe is stuck in neutral, while the so-called BRICs are in a free fall. Also, then as now, we are seeing massive inflows of foreign capital into the U.S.
These conditions have benefited high-end real estate, with foreign buyers gobbling up luxury properties in large markets around the country. This sector has long been considered a safe play when the U.S. dollar rises relative to other global currencies. The most recent version of this trend, however, has probably run its course, with demand starting to peak and valuations becoming frothy. Still, there are other opportunities out there to learn from the past. Consider the following:
**Technology – Just as we saw the tech sector takeoff in the late 90s, the same thing is happening today. Back then, of course, valuations eventually became unsustainable, which led to the swift downfall of many companies that were nothing more than a house of cards. Remember Pets.com? While there have been a few notable tech companies that have seen their valuations plunge this time around as well (See: Twitter, GoPro), the current rally has been far sturdier than the one 20 years ago, with earnings and profits driving stock prices, rather than unchecked optimism. The sector could continue its rise, especially companies that are at the confluence of tech, media and entertainment. Think specifically about firms like Amazon or Activision Blizzard, which have entrenched tech roots but in recent years have also diversified their businesses by expended significant capital to venture into emerging areas such as video and music streaming and content production. Most importantly, they’re also profitable.
**Financials – For the most part, banks have seen their fortunes decline in the wake of the financial crisis, thanks to ramped up regulatory costs and slimmer net-interest margins. With the Fed raising rates late last year for the first time since 2006 – and with more rate hikes potentially on the way – a case can be made that the big banks are as well positioned as they have been in nearly a decade (When the Fed finally took action in December, loan rates moved up but savings rates remained unchanged. Who do you think pockets the difference?). The banks could stand to benefit even more if, as expected, the flight of foreign capital into the U.S persists. One caveat: If equity markets continue to struggle, the Fed will likely put the brakes on future increases, which will make financials considerably less attractive.
**Energy – The market keeps waiting for oil to bottom out. Many thought we were close at $50, then it was $40, and now that oil has dipped below $30, no price seems too low – though the floor is probably near, if not already behind us. Therefore, this could finally be the time to get back into the beaten down energy and oil companies. While it would be somewhat ironic to see such companies in part propped up by foreign investors looking for value – since those are the firms that have suffered the most as the global economy has sputtered – that’s precisely what could happen. Current oil prices are unsustainable for too much longer. If we don’t see a rise soon, an increasing number of small-to-mid sized firm will go broke, not to mention the one-time oil-rich countries around the world like Venezuela and Russia.
**Emerging markets – While a case can be made for getting back into downtrodden energy companies, the story with emerging markets is a bit different. Their struggles are likely to continue well into the future, and there is no reason to play around in this sector unless you are prepared to stomach near epidemic levels of volatility. Indeed, it won’t be the 5 percent dips that typically stirs a media frenzy. It’ll be more like 20 – 30 percent swings that become the norm. This includes China, which is essentially a mature market now, though no doubt going through some serious growing pains as it attempts to adopt more free market reforms.
This isn’t the late 1990’s, but the lessons of the past can and should be used to make investment decisions in the future. If the flight of foreign capital continues, take advantage of the sectors most likely to benefit, while remaining wary of the riskiest corners of the market.
Steven Dudash is President of IHT Wealth Management (www.ihtwealthmanagement.com), a Chicago-based firm with approximately $650 million is assets under management.