Forget Emerging Markets. Hot Topic at Davos 2015 Is the U.S.
Comment of the Day

January 15 2015

Commentary by David Fuller

Forget Emerging Markets. Hot Topic at Davos 2015 Is the U.S.

Here is the opening of this article from Bloomberg:

The World Economic Forum has long been something of a coming-out party for emerging economies, withdeveloping countries dispatching politicians and executives to the Swiss resort of Davos to drum up interest. This year, the big magnet for investment looks to be an older player on the global stage: the United States.

While Brazil stagnates, Russia enters a recession, and India struggles to implement economic reforms, the U.S. is booming as energy prices plummet and Silicon Valley dominates global tech. Though yesterday’s retail sales report damped enthusiasm about the scale of the U.S. rebound, the American economy grew at its fastest pace in over a decade in the third quarter of 2014, reaching an annualized rate of 5 percent.

“The pendulum has shifted,” said Jacob Frenkel, chairman of JPMorgan Chase & Co. (JPM)’s international arm, who’s been attending Davos since the mid-1980s. “The U.S. is now regaining its position in the world economy. It is the place where the recovery took hold in the most robust way.”

David Fuller's view

The US economy has done reasonably well on a relative basis and the US Dollar Index has staged a recovery after a lengthy period of underperformance, although this move has been flattered by the Euro’s weakness.

For investors, Wall Street’s performance has been OK, but the competition is picking up.  Last year, US stock market indices showed an average return of less than 10%.  In contrast, China’s Shanghai A-Share Index soared 40%, mostly in 4Q, India’s Sensex gained 25% and Indonesia was close behind.  These gains are quoted in US Dollar terms.  Less than two weeks into the New Year, the S&P 500 is down 3.2%, while the Hang Seng gained that amount, Shanghai A-Shares +3.4%, South Korea +1.7%, India +4.3%, Thailand +2.1% and New Zealand +1.5%, all in US Dollar terms as of today.  In Europe, following the uncoupling of the Swiss Franc from the Euro, Switzerland’s stock market fell sharply in CHF terms but is up +8.4% this year in US Dollars. 

Many Wall Street commentators may be underestimating headwinds for the US economy from a slowdown in capital expenditure and jobs creation, which had been led by the fracking sector before the slump in crude oil prices.  The US Dollar’s swift recovery, albeit from a low base, is paring profits from corporate Autonomies’ overseas earnings.  The Dollar’s firmness is also a headwind for US companies in intensely competitive sectors, such as the global automobile industry.  The S&P 500 Banks Industry (S5BANKX) has fallen sharply in the last two weeks.  There may also be an initial hike in US short-term interest rates later this year, which could add to the Dollar’s firmness.

I do not doubt the USA’s longer-term potential, not least due to its technology lead and near self-sufficiency in oil and gas.  However, current expectations for 2015’s GDP growth and corporate earnings are on the optimistic side, at a time when the US faces a few more headwinds. 

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