From the time I first heard the words “current account deficit”, they had an immediate negative connotation in my mind. The word deficit has an obvious negative tone. Compare that to a “current account surplus” country. The latter sounds infinitely superior. I’ve always preferred a surplus to a deficit myself.
But when I look at the performance of stock markets globally in 2012, an incredible divergence has developed among “deficit” countries and “surplus” countries, particularly in emerging markets. Here is a link to Bespoke’s great table of 2012 stock market returns by country year-to-date as of December 4th. The best performers in emerging markets are generally “deficit” countries like Turkey, Philippines, India, South Africa, Mexico and Poland. In contrast, the worst performers are generally “surplus” countries like China, Brazil, Russia, South Korea, and Saudi Arabia. (For those interested, you can see a table of surplus and deficit countries here).
A big reason for this divergence has been the limping economies of the developed world. If you’re a surplus country, you are exporting more goods and services than you’re importing, and the countries to which you’re exporting are usually the richer countries of the world. If their demand is insufficient, your entire economy suffers, as exporters suffer, causing businesses overall to suffer, causing demand to weaken internally, and so it continues. However, the deficit countries are not as dependent on export demand to fuel their economy. The countries that I cited above are countries with young populations, high internal consumption demand, and large domestic economies catering to the growing needs of their own consumers. As a result, they have an easier time standing on their own two legs even when global demand is weak.
The big risk to the “deficit” countries is inflation. Since they are dependent on imports, they start to get hurt when global prices rise, particularly energy prices. Oil prices are flat to lower over the past year, offering one benefit. Global easing has been another benefit. Not surprisingly, the “deficit” countries have historically had high interest rates as well, to combat that persistent inflation problem. But one major benefit for them of global QE has been the slide in their own interest rates as investors globally search for yield wherever they can find it, damn the risk.
My long-term thesis for the next 10 years is that global growth will be dominated by the “deficit” countries rather than the past 10 years, which was dominated by the “surplus” countries. Slow developed country growth due to debt problems and poor demographics will leave the surplus countries with fewer foreign export opportunities. Countries with domestic demand will be less affected. Negative connotation or not, deficit countries are better placed to grow. For those looking for the next 10 year investment thesis, I think that’s a good start.
Markets overnight:
- Asia was mixed, with China and India down around 1%, and Japan and South Korea up 1.5%.
- Europe is flat after opening green, then quickly trading red. The Greece bond deal closed, and the ECB has been designated the Euro-Area Bank Supervisor. SPX futures are trading down 0.1% in a quiet overnight session.
- Commodities are lower, led by gold and silver down more than 1%. The dollar and Treasury bonds are slightly higher, after yesterday’s sharp fall.
- Retail sales, PPI, and Jobless Claims data all out at 8:30 am EST.