The most re­li­able source of de­mand

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

The strong third quar­ter growth in US GDP an­nounced last Thurs­day - a 3.5% an­nu­alised rate - not only sug­gested that the Amer­i­can econ­omy is on a sus­tain­able up­ward tra­jec­tory; it also con­firmed that the Fed­eral Re­serve’s decision to end quan­ti­ta­tive eas­ing is ap­pro­pri­ate. Although the faster-thanex­pected head­line growth fig­ure was partly driven by gov­ern­ment spend­ing, the two key en­gines of the econ­omy - business cap­i­tal spend­ing and per­sonal con­sump­tion - both turned in a re­spectable per­for­mance.

What’s more, the out­look re­mains bright. Low US bond yields - de­pressed in part be­cause of wor­ries over Europe - trans­late into a low cost of cap­i­tal for US cor­po­ra­tions, which should en­cour­age busi­nesses to bor­row to fund cap­i­tal spend­ing. The de­mand is there; ca­pac­ity util­i­sa­tion in the US is tight, and out­side the en­ergy sec­tor we are be­gin­ning to see pick-up in cor­po­rate sales, which nor­mally lead business cap­i­tal spend­ing by around three months.

Low yields have also kept mort­gage rates down, which has helped to im­prove the af­ford­abil­ity of hous­ing. Fac­tor in the stim­u­la­tive ef­fect of lower en­ergy prices on con­sumers, and it is small won­der that the Con­fer­ence Board in­dex of US con­sumer con­fi­dence climbed to a 7-year high in Oc­to­ber. Taken to­gether, all th­ese pos­i­tive fac­tors sug­gest an emer­gence of the US “triple merit sce­nario”.

Granted, not ev­ery­thing in the gar­den is rosy. Brighter eco­nomic prospects and ris­ing ex­pec­ta­tions of in­ter­est rate hikes next year will push the US dol­lar higher, es­pe­cially with Ja­pan step­ping up its own QE pro­gramme and with growth else­where in the world re­main­ing weak. That’s bad news for US multi­na­tion­als, which are al­ready see­ing the dol­lar value of their in­ter­na­tional earn­ings eroded by the US cur­rency’s strength. In his third quar­ter earn­ings con­fer­ence call, IBM’s chief fi­nan­cial of­fi­cer com­plained that the ap­pre­ci­a­tion of the US dol­lar is hurt­ing the company’s business. Other cor­po­rate gi­ants, in­clud­ing Coca-Cola, McDon­ald’s and John­son & John­son, are fac­ing the same prob­lem. This is a marked re­ver­sal com­pared with much of the last ten years, when US dol­lar weak­ness boosted the value of their over­seas earn­ings. In con­trast, do­mes­ti­cally fo­cused com­pa­nies with lit­tle by way of for­eign cur­rency earn­ings (and few for­eign com­peti­tors) are largely im­mune to the US dol­lar’s strength.

As a re­sult, although we are pos­i­tive on the US, buy­ing into the broad eq­uity in­dex, which con­sists of both multi­na­tional and do­mes­tic com­pa­nies, may not be the best choice.

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