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It would be nice to know exactly what the world will look like in 2013. That would certainly help us make the most profitable investment decisions.

What will the U.S. economy do in 2013?
Will Europe be any better in the New Year?
What about China and the other emerging markets?

No one knows the answers to these questions. But we all need to have a system to address these issues because it's critical to deciding which companies and industries to invest in now.

My goal today is to share with you how I come up with a view of the Big Picture. I've found that if I use three approaches to shape my world view -- and then combine them -- I get a much clearer picture of what likely lies ahead.

Here are the three approaches to how I put my worldview together.


A. The GDP Growth Approach

This approach is the most generic one. You have seen this many times before.

(1) Overall global growth looks flat, with global GDP expected to be up +3.2% in 2013 and the +3.3% gain in 2012.

(2) The U.S. should muddle along, with the economy expected to grow by +1.9% in 2013 and +2.2% in 2012.

(3) The rest of the advanced world will be struggling. Japan's new government wants to lift growth above the expected +0.8% pace in 2013 after the +1.8% growth in 2012. The Euro-zone's deceleration appears to have flattened out with expectations for growth of +0.0% in 2013 after a -0.5% contraction in 2012.

(4) The bright spot remains the big emerging markets. China is expected to grow at +8.1% in 2013 after +7.7% in 2012. Growth in India's economy is expected to improve +6.6% in 2013 from 2012's +5.6% level.


B. The Foreign Exchange Approach

I find foreign exchange [FX] flows to be extremely insightful for equity investing. If FX flows are moving in your favor, they are most likely going to be there for your equity positions. The current consensus FX outlook for 2013 shows distinct stories playing out.

More . . .

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(1) Asia Pacific is the strongest region. The U.S. Dollar [USD] looks to depreciate against stronger growing Asia-Pacific and Latin American countries: India, China, Brazil, Mexico, and South Africa.

(2) The U.S. outperforms all other advanced countries. The USD looks to appreciate against developed countries: Euro, UK pound, Japan Yen, Aussie Dollar.

(3) Safe havens remain in play. There is USD parity with the Canadian Dollar. A fixed FX ceiling is maintained for the Swiss Franc.

The Asia-Pacific countries compete fiercely for exports to a slower growing group of advanced economies. Appreciation is the likely trend in 2013 for the entire region except Japan and Australia. Currency appreciation and capital investment, in a more muted sense, can be seen for Latin American countries Chile, Mexico and Brazil too.

Europe remains event-driven in 2013. While progress has been made on the core issues driving financial instability in the region, the growth outlook is dim. As a result, the Euro currency could be vulnerable to periods of volatility.

The takeaway is that the fast-growing developing world sees capital inflows and capital appreciation.


C. The Regional Approach

Most discussions of the big picture tend to take place in a mindset of globalization. In other words, if the Euro-zone recession spreads to the U.S., the over-simple globalization discussion says all regions outside Europe feel the pain one-for-one. If China slows down, the globalization discussion says all regions outside of China feel pain one-for-one. Ditto for the U.S. growth influence on these two regions.

To regain some balance on the subject of 'the world', I decided to use Purchasing Power Parity Adjusted GDP numbers in dollar terms to get a fresh 'Regional' perspective. The following was dredged up from IMF statistics.

That is as close as Apples-to-Apples as I think we can get.

What Do we Find?

(a) The GDP of the Asian region is about $26 trillion, with China alone at $13.5 trillion. Japan comes in at $4.7 trillion; India at $5.0 trillion.

(b) I put together a 'U.S. region' to include the U.K., Canada, and Mexico. The GDP of this 'U.S. region' comes in at $23 trillion, with U.S. itself at $17 trillion.

(c) The Euro Area and Central and Eastern Europe come in at $14 trillion, with Germany at $3.3 trillion.

(d) Latin America comes in at $7.6 trillion, with Brazil at $2.6 trillion.

This GDP data sets us up to better explore a second concept: Regionalization.

What is common among the regions is that each has a Sun and a Solar System. In Asia, China is 50% of the GDP, while the U.S. is close to 75% in the 'U.S. sphere'. In Europe, Germany is 25% and Brazil contributes 34% of Latin America.

Asia is growing quite strongly, but leadership within the region is shifting from the previous leader, Japan, to the new leader, China. In Asia, as in any other region, regionalism intensifies interactions. The economics inside a region is always more decisive than in a global framework. Seen through the prism of regionalism, the Euro-zone crisis gets clearer too.

Germany as a 'Sun' has only 25% of the GDP strength -- the lowest among world regions. So this region is inherently unstable. No surprise the Euro-zone currency crisis has been protracted. From this perspective, Latin America is also a lot like Europe.

How about the 'U.S. region'? Here, we see the key strength of this region vis-à-vis the others. The U.S. 'Sun' is 75% of the story. Decisions and directions are much more coherent in this region.

This means that regionalization can lead to far sharper insights on differences among world regions than globalization. Don't oversimplify and assume Europe's problems in 2013 will become the U.S problems. Or that Europe's problems will overturn the Asian story.


Three Conclusions are Better than One

One, Asia will be a cornerstone for next year.

Two, the U.S. will be in better shape than any other advanced country.

Three, the struggle in Europe will be related to this region trying to keep up with the above two conclusions.


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Happy investing to all of you!

John

John Blank, PhD, is Zacks' Chief Equity Strategist, in charge of publishing weekly articles and monthly periodicals on the global financial markets. He invites you to sample all of our trading and investor portfolios through our Zacks Ultimate program.

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