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The US could be approaching a 2011-style debt ceiling market meltdown, but worried investors shouldn’t abandon ship, Wall Street analysts say. Instead, they should jump on a ship (hypothetically speaking) and plant their money in overseas equities.
Those extraordinary measures are mostly behind-the-scenes accounting maneuvers, Treasury Secretary Janet Yellen told CNN’s Christiane Amanpour — adding that they could stop working as soon as early June.
That means that if Congress doesn’t raise the debt ceiling by then, the US could default on its debt. That “would undoubtedly cause a recession in the US economy and could cause a global financial crisis,” said Yellen.
But lawmakers remain in a deadlock about whether to lift their self-imposed borrowing limit: Democrats want Congress to pass a debt ceiling increase without conditions but Republican leadership says that any debt limit increase should be accompanied by spending cuts.
Wall Street’s response: A debt ceiling meltdown creates serious risk for investors.
Markets plunged during the last major debt ceiling crisis in 2011 — that episode from a dozen years ago freaked out investors and prompted the loss of America’s perfect AAA credit rating from S&P. In the wake of the credit downgrade, the S&P 500 dropped by 15% and sectors with close revenue ties to US government funding — health care and defense — fell by 25%.
So what’s a spooked investor to do? Traders should be prepared for a “worse outcome,” said David Kelly, chief global strategist at JP Morgan. Kelly told CNN that they should consider creating a “debt-ceiling disaster emergency kit” that includes “high-quality international stocks and bonds, denominated in foreign currencies.”
Kelly’s not alone. In a research note Friday, Barclays European equity strategists said that Europe and the US were “decoupling,” with more upside in Europe. Lisa Shalett, chief investment officer at Morgan Stanley believes that American investors should consider putting their money into emerging markets this year.
Even if the debt ceiling debates are resolved, it’s not a bad idea to have some money invested abroad just in case of upheaval.
“You diversify because the things you don’t expect end up biting you,” Kelly said. Even without a meltdown, he explained, equities abroad have “relatively cheap valuations” and the dollar is still super strong, meaning US investors get a double discount in overseas markets.
Global equity markets have been outperforming the S&P 500 since mid-October. The MSCI All Country World Index (which excludes the US) has jumped by about 24% since its October lows. The S&P 500, meanwhile, has gained about 12%.
Focusing just on European stock performance, the euro STOXX benchmark has beaten the S&P 500 by more than 18 percentage points since September. That’s the most it has outperformed Wall Street by in 20 years, according to Morgan Stanley.
How to do it: Trading abroad is fairly simple as nearly every major US financial institution offers a smattering of global equities funds — some of those offerings are denominated in a foreign currency.
If investors are wondering how much to invest, Kelly has a simple solution. About 60% of global stocks are listed in the US and about 40% of equities are listed elsewhere — a well-hedged portfolio could have the same distribution, he said.
Of that 40%, about 28% of global stocks are traded on European exchanges and the other 12% are in emerging markets (mostly in China).
The last few decades have been full of unforeseen market meltdowns, said Kelly. It wouldn’t hurt Americans to invest in foreign equities … just in case.
Wall Street may be getting its hopes up for an economic “soft landing” instead of a full-blown recession. News flash: Corporate America isn’t as optimistic as investors are.
Executives at top companies continue to sound far less sanguine about the economy’s prospects.
Verizon (VZ) CEO Hans Vestberg said during the company’s earnings…