U.S. investors tend to think mainly about the domestic economy. However, investors and consumers in every country tend to react rationally and similarly to the same incentives. Right now, consumers in the U.S. are pulling back on spending and rebuilding their balance sheets. Their views on risks and rewards have changed. But this is not just a domestic phenomenon. Consumers in the U.K., for example, are doing exactly the same thing. The Daily Telegraph reports:
Families are banking more money than they are borrowing for the first time in more than 20 years, a Bank of England report shows.
The austerity, which is also being seen in government budgets, is coming from the same two sources as in the U.S.:
Peter Spencer, the chief economic adviser to the Ernst & Young ITEM Club, said: “People are reducing their borrowings. It’s the combined effect of some families not being able to get credit and other families choosing to pay their debts off.”
In other words, some of the austerity is voluntary and some is involuntary. The net result is that savings rates are rising in the U.K., as they are here:
Overall savings, including pensions and investments, rose last year from 2 per cent of household income to 7 per cent as families prepared for leaner times, according to the Office for National Statistics. This year, the savings ratio has risen further, to 8 per cent, a level not achieved since 1998.
Consumer behavior, given similar incentives, tends to be quite similar. Investor behavior is no different around the globe. When the economic and political climate seem uncertain, as they are now, investors tend to be risk averse. When investors feel more confident, they are more likely to embrace risk in the quest for higher returns. (Return factors like relative strength tend to work across markets and asset classes because behavior really isn’t so different, despite location and circumstance.) I suspect we will see this same behavior in every country that is currently feeling a fiscal squeeze.
Source: Sizzling Europe
Although the immediate macro-economic effect of increased savings may be slower growth, the long-term impact is a rising store of cash to fuel the next market boom. Money goes where it is treated well-and that asset doesn’t have to be domestic equities. Even in a difficult overall environment for financial assets, there are always big winners. Relative strength can help identify those winners around the globe, wherever they are.
