25th January 2011
Could the US be the surprise winner of 2011? The IMF has raised its estimates for 2011 global growth on the back of stronger output from the US. It says President Obama's extension of the Bush era tax cuts, plus the renewal of emergency jobless benefits will push the US to GDP growth of 3% in 2011, the fastest of the Group of Seven economies.
While the UK's GDP figures are being revised down, US GDP in the third quarter has been accelerating . This is without the impact of a further £600bn of quantitative easing plus other stimulus measures slated for next year. These measures are likely to have the secondary effect of weakening the dollar, which should stimulate export growth.
This is gearing up for a more promising 2011. Adviser Chase de Vere believes that this may stimulate a liquidity-driven equity rally in the first half of 2011. It points out that the first round of quantitative easing (from November 2008 to June 2010) contributed to a rise in the US stock market of 78% from March 2009 to April 2010.
The Dow Jones and the S&P 500 have some catching up to do. The Dow Jones has trailed the FTSE 100 by more than 20% over the past 3 years. The S&P 500 has performed better, outperforming the FTSE 100 in 2010, but is still around 8% lower over three years. Chase de Vere believes it is better to ‘ride with the tidal wave of money rather than swimming against it'.
A recent Bloomberg poll of investors, analysts and traders suggested that the US is the favoured developed market for 2011. Many are predicting a surge in growth in 2011 and say that stock prices are undervalued compared to corporate earnings.
Of course, the US is not without its problems. Its debt situation is parlous and worsening. US politicians have studiously avoiding tackling the deficit. Schroders chief economist Keith Wade suggests that the stimulus measures are merely ‘kicking the can down the road by avoiding fiscal consolidation'.
Then there is the unemployment situation. The Federal Reserve has warned that economic growth is too slow to stimulate jobs growth . There is a chance that this will change in 2011 as companies begin to put their hefty cash balances to work and there have been nascent signs of improvement. However, these are small signs at best and companies have shown more inclination to spend cash on merger and acquisition activity, thereby reducing jobs. This remains a headwind to US growth.
None of the developed markets look exciting, but the emerging market growth story has been well-told and many investors are looking to refocus. The US has a lot of problems, but for investors seeking growth, it may be the preferred area for 2011.