America’s Edge in the Politics of Global Investing

By admin ~ May 31st, 2011 @ 3:17 am

Unlike most investment advisors and strategists, I pay a lot of attention to politics, both here in America and in overseas markets. The politics of a country tells me a lot about the probability of long-term economic growth and stability – vital ingredients for successful investing. It also reveals a country’s culture, business climate and durability in the wake of shocks like the real estate downturn. Countries with free and open political systems can take sledgehammer blows and come back fighting.

And while we do not know whether the Dow will be up or down tomorrow, we do know that, just past midnight, the citizens of Dixville Notch, will, as usual, be the first American citizens to vote in the New Hampshire presidential primary.

The current presidential campaign really has my blood pumping. The race between Senator Clinton and Senator Obama has been turned upside down with John Edwards jockeying for an opening. The Republican race is even more fluid and open with the sudden rise of former Governor Huckabee posing a threat to former Governor Romney, former New York Mayor Rudy Giuliani losing steam in national polls and re-directing his efforts to big states like California and Florida. All this movement has creating an opening for the old lion, Senator John McCain, whose campaign was left for dead only a few months ago and is staging a comeback in New Hampshire.

For a political junkie like me, it doesn’t get any better than this.

The Chinese leaders love to describe American democracy as a “moneybags democracy” but the current race highlights that issues, personality, and strategy can oftentimes trump money. Mr. Huckabee won in Iowa despite being outspent 20 to 1, the upstart Mr. Obama has matched the Clinton money machine dollar for dollar by gathering small donations and Mr. McCain is back in action despite his bus budget.

Just as important, even candidates far back in the polls can raise money with a platform of conviction. Libertarian Texas Congressman Ron Paul recently broke the one day fundraising record, raking in more than $5 million through an internet campaign.

Then there is the relatively civil conduct of our campaigns and the fair, smooth transfer of executive power. Sure politics everywhere is a contact sport but we look pretty good compared to the fisticuffs last month in South Korea, the chaotic situation in Pakistan, and the ham-handed turnover of power in Russia from Mr. Putin to well – Mr. Putin.

Pakistan is the clearest example of political turmoil and one wonders how events unfolding there might impact its neighbor India’s booming stock market represented by ETFs such as (IFN). Next door neighbor India is closely monitoring events in Pakistan for any security challenges that may come about. Keep in mind that there are more Muslims living in India than in Pakistan and that both countries possess nuclear weapons. Since the creation of Pakistan in 1947, the two countries have fought three major wars. The first two stemmed from the conflict over Jammu & Kashmir, the northernmost state of India, which also shares a border with Pakistan. The accession of Jammu & Kashmir to India in 1947 has long been disputed by Pakistan.

2008 also brings some important elections which will no doubt affect markets. In Thailand, the People’s Power party, allies of deposed Prime Minister Thaksin Shinawatra, emerged as the largest party after Christmas Eve elections, but fell just short of a majority so the forming of any government in 2008 remains unclear. It is tough to have confidence in the Thai market (TF) without some confidence that a government is in place, even though it is attractive from a valuation perspective.

Japan’s premier, Mr. Fukuda, not even three months into the job, is suffering from the same lack of confidence and popularity that sank his predecessor, Mr. Abe. This helped make Japan Asia’s worst performing index (EWJ) last year. Is it an accident that Japan’s bull market coincided with former Prime Minister Koizumi’s strong economic and foreign affairs agenda?

Presidential elections are due to take place in Taiwan this March and will have significant implications for relations with China. It could very well open up more economic channels between the two countries and serve as a catalyst for Taiwan’s recently lackluster ETF (EWT). South Korea faces parliamentary elections in April, the results of which will be crucial to shoring up support for pro-market reforms planned by President-elect Lee Myung-bak.

This highlights one of the most difficult aspects of a working democracy – the concept of a loyal opposition. Many cultures have great difficulty grasping and practicing that you can oppose government policies and seek to change them while still being patriotic and loyal to your country. The expression “where opinions clash, freedom rings” is alien and unwelcome in many countries around the world.

Our two-party system, while roundly criticized by many, is also very important. Coalition governments tend to be a bit unwieldy and unstable. Just note the situation in India where some relatively small Communist party factions in the ruling coalition block significant market economic reforms.

And great bull markets usually begin to build momentum together with significant economic market reforms. America’s economic growth even today can be traced back to President Reagan’s supply side tax cuts, the centerpiece of his 1980 platform. Ireland’s economy was a mess with middle-income earners taxed over 60% of their wages and government borrowing out of control.

Then Charlie Haughey became prime minister. Taxes and spending were cut sharply and multinationals like Apple, Microsoft and Dell were lured across the Atlantic through a range of incentives including low corporate tax rates. The Irish market was off and running, but alas, the impact of these dramatic reforms has faded with time and with it prospects for Ireland funds such as the New Ireland Fund (IRL).

Similarly, the reforms enacted by former Australian Prime Minister Bob Hawke during the 1980’s set the stage for a remarkable run of prosperity, and reinforced by John Howard, helped make the Australian market (EWA) the darling of global investors. The same was true of Prime Minister Margaret Thatcher’s election and the subsequent revival of the British economy.

The reason all of these programs were successfully executed and lasting is because they first garnered support through the political process. It may take a bit longer than many would like, but reforms vetted through the democratic process are lasting and gain legitimacy. In the end, voters demand and reward change.

One interesting and important global political trend is that support for globalization is now stronger in emerging market countries than here in America. This is a sharp reversal from just a decade ago when emerging market politicians used foreign multinational companies as scapegoats.

A recent poll by the Wall Street Journal and NBC found that 58 per cent of Americans think that globalization has been bad for the US and that only 28 per cent believe that it has been good. Ten years ago the split was more even: 48 per cent thought that globalization was good and 42 per cent that it was bad. The biggest surprise is that supporters of the two parties are no longer far apart on the question. Globalization has been bad for the US according to 55 per cent of Republicans and 63 per cent of Democrats. This sentiment can only be turned around through open and honest political debate about economic policies that will enable American companies to generate more jobs and profits by gaining market share in fast-growing emerging markets.

Politics in democracies like America also mirror its entrepreneurial business culture. In most cases, candidates for public office today are self selected, not chosen by the party machine. Candidates for public office in America are just like our 25 million small business owners that struck out on their own with little more than a hope and a prayer and somehow managed to endure and prosper.

But I don’t mean to imply that politics is just important because of its impact on business. Rather it goes to a country’s core values and to the heart of its quality of life. What good is all the money in the world if citizens do not have freedom of expression, freedom of religion, due process and the right to choose ones leaders? No thanks.

Then there is the ultimate test. Whether people around the world want to come and live in your country. No matter what you think about securing our border with Mexico, it is important to remember that people want to get into America while in some countries walls have kept people in who want to get out.

So even in the face of a temporary economic slowdown, banking problems, global competition and turbulent markets, keep in mind that American politics is a major competitive strength. Without a free, open and robust political process, all the economic growth will only get you so far until you hit a giant speed bump and derail.

So don’t forget to take into consideration politics when building your global portfolio.

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