blog

The Global Outlook: What to Watch For

by Tricia

Here in Chicago at the Morningstar Conference, the watchword is complexity. If I had to pick the most important thing to talk over with our clients, it would be the convulsive global environment.

The operating environment is almost completely reversed from what anybody would have dared to say even a year ago. The emerging markets are net creditors, and the US is a net debtor. The $350 billion dollars of market recapitalization came from the Asian central banks, not from the G-7. So did 60% of all global growth. Brazil's sovereign debt rating is higher than that of Citi's. The expectation is that the next massive recapitalization need will be that of the American consumer, whose resilience carried the global economy through the 1997-98 contagion.

That's nerve-racking. Consumer spending is about 70% of the American economy, and the American economy is about 1/3 the global output. In the last twenty years, Americans have had most of their equity stored in the value of their homes. We are right on top of the point where it will make sense for some people to drop off their keys and walk away from their mortgages. Certainly, for the first time in American history, homeowners are falling behind on their mortgage payments before they fall behind on other payments.

As we said in "Future of Distribution," the ongoing erosion to investible assets as well as to margins, makes a more compelling argument for global diversification (as if you needed another one) -- not just geographically, into the BRICs or "developing" (we're going to have to come up with a different nomenclature soon) Asia, but across commodities and industries as well.