Mixed Messages

by | Jul 14, 2014

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The headline figures for the US economy are slowing, says Brian Tora, but the market is strong.


The US has long been a market that’s dangerous to ignore. Not only is it by far the largest in capitalisation terms; the American economy also remains the most important in terms of our global wellbeing.

But recently a strong performance by shares over there has been watered down by a declining dollar. The question anyone charged with assembling portfolios of equity investments should be asking is this: where are markets and the currency going from here?

A Disconnect

The signals coming out of what is arguably the only remaining world super-power (though doubtless China would disagree) are mixed to say the least. Unemployment is coming down faster than expected, the housing market is bouncing back, and yet economic growth has faltered. Not only did the economy shrink in the first quarter of this year, but such venerable bodies as the International Monetary Fund have reined back their expectations for 2014.

Yet despite this underlying concern, shares on Wall Street remain close to their all-time high, with the S&P 500 Index tantalisingly close to the magic figure of 2000. Moreover, merger and acquisition activity and new share issuance are also buoyant. Indeed, a Chinese on-line retailer recently decided to list in New York, rather than Shanghai or Hong Kong. On the financial front, things are looking good.

Where’s the Confidence Coming From?

America has a number of things going for it at present, including its renaissance as an oil giant. Once a major producer, it has slipped down the rankings over the last hundred years, but it is fast re-emerging thanks to shale oil. Moreover, after a long ban on exporting, the Americans are now considering selling oil abroad again. With unsettling developments looming in the Middle East and Russia, such an approach could bring comfort to investors fearful of geo-political consequences.

Back in the late 1990s, I took over leadership of an investment management operation that had decided to back Asia over Europe and America. I could understand the reasoning, but the size of the bet meant that when the Asian debt crisis hit, performance took a tumble. Moreover, during the same period the US was benefiting from its continued commitment to technology – something that has continued since. Consigning America to the sidelines was an expensive mistake then.

It could be today, too. While the technology bubble some 15 years ago wrought disaster amongst the investment community, much of the carnage can be put down to greed and carelessness. US technology giants still rule the roost in this increasingly wired world of ours. That, and energy, combine to make America a market that is hard to ignore, despite the continuing rise of the major indices there.

Carney’s First Year

Meanwhile, back at home, our new Bank of England Governor celebrates a year in his post. Mark Carney started his new job on the 1st July 2013. Let’s be fair, there hasn’t been a lot for him to be aggressive about since he assumed office. OK, he wants to head off a housing boom and he’d like to raise interest rates – just a little. Still, I am reminded of a good description of central bankers from one of their group. An Asian himself, he likened them to tea. You would only learn how good they were once they were in hot water.

Japan Welcomes Inflation

Don’t forget, too, that Japan has just recorded its highest inflation level since 1982. The 3.4% rise in the cost of living there is mainly down to tax increases, but it surely shows that Abe’s strategy is taking hold even if we can’t be sure how successful it will be. Deflation has turned what was once the world’s second largest economy into a near basket case for investors. Only time will tell if Abenomics can rescue this once world-beating nation. 

 

Brian Tora is an associate with investment managers, JM Finn & Co

 

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