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February 23, 2015

February 23, 2015

Central Banks Continue to Hold the Keys to Markets

We believe the U.S. Fed will keep rates low for longer, attracting funds to U.S. stocks that can grow and pay a good dividend.  We believe European stocks are likely to rise as Euro QE gets underway, in spite of fears around Greece and Ukraine.  We would buy the dips in India as Modi moves his pro-business vision forward.  And in China, we believe the Chinese stock market will be viewed as the most attractive investment destination by Chinese who have few other attractive options — and liquidity from the central bank will support demand for stocks as well.

In Last Week’s Commentary, We also discuss:
  • India ascendant.  Since China’s reforms in the 1980s, China and India have followed radically different development paths.  China pursued low-cost, labor-intensive manufacturing, and foreign direct investment; and it has seen its per capita GDP go up by a factor of nearly 13.  India, although non-aligned, relied on the Soviet Union for cheap oil and pursued more bureaucratic, socialist development policies.  Its per capita GDP rose by a factor of just four in the same period, even though it made some improvements under World Bank and IMF programs in the 90s.  Now, with China’s growth rate slowing, India could be poised to take the growth mantle under Prime Minister Narendra Modi.  He will need help in shifting the Indian mindset towards the acceptance of low-value-added manufacturing, which has proven to be a very successful path to rapid economic development, and for increasing the standard of living in a developing economy.

  • “Any sufficiently advanced technology is indistinguishable from magic.”  A few weeks ago, we discussed augmented reality; this week we look at “programmable matter” (PM).  PM would allow, for example, the creation of universal tools that could change shape and function to whatever the user needed; universal replacement parts; airplane wings and tires that adapt to external conditions; or clothes that change to match the weather.  The beginnings of this technology are already being developed in university labs and at DARPA (the Defense Advanced Research Projects Agency — the U.S. military’s cutting-edge R&D outfit).  The technology dovetails with 3D printing in many ways, and the 3D printing space is where commercial applications are likely to make their first appearance.
  • Endgame in Ukraine.  Another ceasefire deal has been reached in Ukraine, offering jittery markets a little solace — although that ceasefire is already on shaky ground.  In the big picture, we believe that Vladimir Putin will not be satisfied until Ukraine is definitively blocked from NATO accession and from closer political and military ties with the West.  We think this could happen via a constitutional settlement that makes Ukraine a federation in which the eastern regions will never agree to NATO membership.  Until then, fighting will be a periodic source of worry for markets, even as Euro QE kicks in — but while Putin eases off the pressure and prepares his next move, the fighting will likely die down.
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