by Smead Capital Management

On a recent trip to Europe we participated in a forum in Milan of five stock picking organizations. Two were from Brazil, one was from Malaysia and one was picking stocks inside China via the Shanghai Stock Exchange. We believe what they said was an enticement to investors for the purpose of getting them excited about stocks in their country. To us, this reveals a great deal about where prices in emerging stock markets and commodities are headed over the next five to seven years.

China

We were allowed ten minutes to make an introductory presentation to a group of 80 to 100 institutional investors and institutional sales professionals. Our firm was fifth out of the five to present. Each of the other four explained all the wonderful business-friendly things that the governments of Brazil, Malaysia and China were going to do to make robust economic growth. They then extrapolated how this robust growth would equate to attractive returns from owning common stocks in the three countries going forward.

Here is what we think we know about economic growth and common stock investing based on anticipating the effects of government policies: when Democrats are in power, Republicans tend to believe that the government is ruining the economy; and when the Republicans are in power, the Democrats usually believe that the Republicans are ruining our economy. So, over a twenty-year time frame, this means that almost everyone in the US spends a great deal of time thinking that government is ruining the US economy. In case you are wondering, we as a firm remain politically agnostic and believe that the Federal government is somewhere between a negative factor to a neutral one as it pertains to economic growth.

Why would we bring this up? First, we think an amazingly large part of asset allocation in portfolios in the US, both institutionally and for high net worth individuals, seems dependent on the ongoing success of the Chinese economy. They seem to have had uninterrupted growth for over 30 years and their “red capitalism,” with a high degree of central control appears to have outperformed “free-market” developed countries like the US.

Full article via smeadcap.com