Ptolemy was convinced that the Earth was the center of the universe. As anomalies cropped up that conflicted with the then-known laws of physics, orbits simply didn’t match up with what was observed. Rather than throwing out the theory because it didn’t match reality, reality was modified to fit the theory. The next thing you know, planets were moving backward so that their orbits matched observations.
U.S. investors have to be careful about believing in retrograde motion too. There are many observations that the center of the investment universe is no longer in the U.S.
For example, this item from MarketWatch today:
A typical emerging-market private-equity investor will have 16% to 20% of his or her total private equity allocation targeting emerging markets in 2013, presenting an increase from the current 11% to 15% allocation, the latest Emerging Markets Private Equity Survey produced by Emerging Market Private Equity Association (EMPEA) and Coller Capital showed.
Or, consider how Goldman rose to the top of the mergers and acquisitions list, according to Bloomberg:
The merger boom that started in 2010 isn’t looking like any of the past three. The takeover binge of the 1980s was fueled by Michael Milken’s junk bonds; the late- 1990s wave of Internet and telecom deals, by inflated stock prices; and the private-equity frenzy that produced a record year for deals in 2007, by leveraged loans.
The more recent surge comes from the expanding BRIC economies — Brazil, Russia, India and China — and beyond.
The center of the universe is shifting in currency markets, too. From a CNBC report last week:
In a statement released at a summit on the southern island of Hainan, the leaders of Brazil, Russia, India, China and South Africa said the recent financial crisis had exposed the inadequacies and deficiencies of the current monetary order, which has the dollar as its linchpin.
The U.S. is still the biggest market, but the relative growth seems to be favoring other economies. In 1900, the biggest market was in London, and while the U.K. still has a large market (and is a wealthy country), it is no longer the center of the investment universe. The world didn’t end for England; it just created other investment opportunities, some of which were overseas.
It seems to me that there are two ways to respond to changing circumstances: 1) hand-wringing or 2) adaptation. Politicians seem to be choosing option #1. There is much worry about losing jobs, deficits, trade balances, the declining dollar, etc. There is very little actual adaptation—for example, actually doing anything to reduce deficits or job losses. As an investor, you don’t get to make policy decisions. You just have to play the cards that you are dealt. Right now, the cards say that investment options are increasingly global. Your investment policy needs to take that into account when making decisions about portfolio construction.
