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Dilantha De Silva
Dilantha De Silva
Articles (185)  | Author's Website |

Don't Bet Against America but Be Open for New Opportunities

Warren Buffett advised investors not to bet against the U.S. in his annual letter

March 04, 2021 | About:

Warren Buffett (Trades, Portfolio), arguably the most successful investor the world has ever seen, is also the Chairman and CEO of Berkshire Hathaway, Inc. (NYSE:BRK.A)(NYSE:BRK.B). He once again advised investors to never bet against America in his most recent annual letter to shareholders. Specifically, the guru wrote:

"When you next fly over Knoxville or Omaha, tip your hat to the Claytons, Haslams, and Blumkins as well as to the army of successful entrepreneurs who populate every part of our country. These builders needed America's framework for prosperity – a unique experiment when it was crafted in 1789 – to achieve their potential. In turn, America needed citizens like Jim C., Jim H., Mrs. B, and Louie to accomplish the miracles our founding fathers sought. Today, many people forge similar miracles throughout the world, creating a spread of prosperity that benefits all of humanity. In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country's economic progress has been breathtaking. Beyond that, we retain our constitutional aspiration of becoming "a more perfect union." Progress on that front has been slow, uneven, and often discouraging. We have, however, moved forward and will continue to do so."

There is no arguing with the fact that betting against America has not been a lucrative decision for investors throughout the country's history, but the time might be right for investors to look beyond our borders to generate alpha returns.

Is America the most ideal country for investment?

It is no secret that America has been a global superpower and has developed the world's largest economy beginning some time around World War I and World War II. With an outstanding economic performance over the past decades, the country seems all set to recover from the Coronavirus-induced recession as well.

Buffett wrote that "despite some severe interruptions, our country's economic progress has been breathtaking." Although economic prospects are improving, many other gurus including Ray Dalio (Trades, Portfolio) believe America's leading position in the global economy is facing a material threat.

There are many factors that should be considered when determining which nation is demonstrating a strong economy that is ideal for investment. Given the decline in foreign direct investment in the U.S, the shrinking GDP in 2020, the increasing government debt burden and the slow and steady growth rates the country is expected to achieve in the next couple of decades, one can argue that the U.S. is increasingly reaching maturity from an economic growth perspective.

Source: U.S. Bureau of Economic Analysis

In stark contrast to the U.S.'s bumbled handling of Covid-19, countries like China, South Korea and Taiwan have successfully contained the further spread of the virus. In China, as a result of its early lockdown measures, the economy recovered sharply from the recession, and the country became the only major economy in 2020 to report positive GDP growth. Last year, China also became the largest recipient of foreign direct investment knocking down the U.S. as well.

Considering these statistics, it would be reasonable to conclude that America will present good investment opportunities for prudent investors for many years, but there might be good opportunities (particularly growth opportunities) in other fast-growing regions as well.

Economists are divided on the path to recovery

In January, temporary layoffs in the United States dropped down to 2.7 million, while permanent job losses increased to 3.5 million, showing long-term economic scarring resulting from the recession.

Regardless of how much funding the U.S government has provided for businesses to help navigate the crisis, it will take a prolonged period of time for the economy to rebound meaningfully. Economists seem divided on the outlook for the American economy. As illustrated below, the Fed projects a full recovery by the end of this year, whereas Deloitte believes it will take much longer.

Source: Reuters

Many things stock price-wise will depend on the impact of the new stimulus bill and the continued intervention of the Federal Reserve.

The recovery phase might bring about the best from emerging markets

Even with the U.S. leading the global economy right now, it is projected that the country will report sluggish growth in the recovery phase. In the second quarter of 2020, the U.S economy hit a rock bottom by declining 32.9%. Foreign direct investment declined from $251 billion in 2019 to $134 billion in 2020 as well.

Source: U.S. Bureau of Economic Analysis

The World Bank projects China to surpass the U.S. and become the world's largest economy by 2050. China being the world's largest population and number one exporter gives them an advantage in overtaking the U.S. economy. Other economies that are rapidly evolving are Japan (currently the third-largest economy) and India with projected GDP of $5.6 trillion and $4.9 trillion in 2024, respectively.

The reason these statistics are so important is because higher economic growth results in higher corporate earnings, which in turn will lead to higher stock prices as well. The ability of a company to generate revenue and earnings growth depends on the macro-economic conditions of a country. From this perspective, it seems rational to allocate at least a small portion of an investment portfolio to international equities in a bid to benefit from changing global economic conditions. Last year, the Shanghai Stock Exchange exceeded $10 trillion (+112.7%) in value for the first time since 2015, which highlights the momentum behind emerging market stocks.

Currently, the biggest advantage America's economy has over China is the U.S. dollar being the world's global currency, giving it more control over economic matters. China is working hard to make the Yuan the next global currency, and it succeeded in the first step in 2016 as the IMF recognized the Yuan as a world reserve currency for the first time in history. Amid the Chinese economic recovery, the Yuan significantly appreciated against the dollar in 2020 and continues to do so in 2021 as well, driving global investors to consider the Yuan as a safe haven during times of economic crisis.

Takeaway

While both the U.S. and China are good investments, China seems to have an upper hand as a lucrative long-term investment opportunity. The key here is to not be limited to a certain business sector or a geographic location when it comes to finding the best investments.

As Peter Lynch famously said, "the person that turns over most rocks wins the game. And that has always been my philosophy," highlighting the importance of being open for new possibilities, opportunities and ideas. Striking a balance between U.S. and international stocks seems to be the best way forward to capturing alpha returns in the long run.

Disclosure: The author does not have any shares mentioned in this article.

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About the author:

Dilantha De Silva
I am an investment professional with 5-years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities.

I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, GuruFocus, and TradeGrill to produce investment-related content.

I\\\'m a CFA level 3 candidate and an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK). I am a registered candidate for the Chartered Wealth Manager program as well. During my free time, I enjoy reading.

Visit Dilantha De Silva's Website


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