International investing. The US economy is continuing to power ahead

When it comes to questions of global investment, there is little doubt that the world’s investors still turn their collective attention to the United States of America. Importantly, despite an abundance of persistent global risks, the US economy is continuing to power steadily ahead, creating economic growth and jobs.

For the Australian economy and its investors, this poses both positive and potentially challenging scenarios.

In the first part of the 20th century, one of the world’s most famous and intelligent investors, Benjamin Graham, was quoted as saying, “To be an investor, you must be a believer in a better tomorrow”.

It seems a strikingly obvious statement and yet, with so much of our daily news cycle consumed by negativity, it serves as a useful reminder of the collective opinion of global investment markets.

After all, if we didn’t believe that banks will look after their depositors, that most borrowers will repay debts, that companies on average will create rising profit over time, and that properties will generate rent, then there really would be no point investing.

Fortunately, despite some risks, today’s investors should be able to look to global markets with a measured level of optimism.

US recovery powers global growth

After all, if we didn’t believe that banks will look after their depositors, that most borrowers will repay debts, that companies on average will create rising profit over time, and that properties will generate rent, then there really would be no point investing.

Fortunately, despite some risks, today’s investors should be able to look to global markets with a measured level of optimism.

US recovery powers global growth

Six years on from the start of the global financial crisis (GFC), it is clear the US economy has substantially recovered.

Chart 1 demonstrates the comeback in the US job market and that its economy has collectively created 9.2 million jobs since the low point of the GFC.

Most recently, the US economy added 142,000 jobs in August 2014.

This was actually taken by the market as a bit of a disappointment because, for the six months prior, jobs had been growing by more than 200,000 per month.1 Importantly, the longer term trend of US jobs growth is positive.

Also, the US experienced solid growth across its economy in the second quarter of 2014.

Adding to this momentum, US Department of Commerce figures show that after-tax corporate profits climbed at the fastest pace in two years in April through June 2014.

Further, businesses continue to increase investment, including on construction of new facilities.

US consumers, too, are stepping up their spending, albeit modestly.2.

Not surprisingly, however, with all this positive news, market participants are now focusing on when the US Federal Reserve Bank will move to return interest rates to a higher (and more normal) level.

Chart 1:

Total Employment (United States)
Employment Chart

Currency markets highlight US strength

With the prospect of higher interest rates in the US only a matter of time, and with the demonstrable strength in the underlying US economy, it’s not surprising that the US dollar (USD) is strengthening.
Charts 2 and 3 below show the relative value of the Australian dollar (AUD) against the USD over the past five years and the past six months.

As you can see, for extended periods between 2011 and 2013,the AUD was trading higher than the USD.

In September, however, the AUD took a considerable step back towards its more historical level of around $0.75.

Weaker Australian dollar of some benefit

Like many observers, including the Reserve Bank of Australia, our view is that the AUD will most likely continue to move back towards its historical trading norm of around $0.75.

In turn, this will assist local manufacturers, miners and tourism operators, although it may mean Australians have to pay more for imported goods.

Europe and China – potential but risks persist

While the US’s economic performance continues to provide a measure of calm to international investment markets, the outlook for other markets, such as China and Europe is mixed.

Despite appearing to have initially dragged its collective economies out of the worst of the GFC, Europe is now showing some signs of stagnation. In early September the European Central Bank made the decision to again cut its interest rates and to embark on a program of large-scale asset purchases.

In China, questions about the extent of its slowing growth continue to persist as its leaders seek to shift its economy from infrastructure and export-led growth to domestic consumption growth.

A better tomorrow

In summary, while global risks continue, the ongoing growth in the US economy provides cause for some investment optimism.

That said, it’s important to note that markets are forwardlooking and that many market participants seek to price in a recovery before it actually occurs, thereby earning profit when – and if – it eventuates.

This largely explains strong broad-based growth that has been evident in US investment markets over the past two years, which, rather than continuing to be broad-based, will likely become more isolated and selective.

In any case, we continue to remain broadly optimistic about Graham’s “better tomorrow” in global markets.

1. US Labour Department, September 2014
2. National Income and Product Accounts, US Department of Commerce,26 September 2014 Article courtesy of Australian Unity Investments

Important information

This article contains general information only and should not be construed as investment or financial advice. Any examples or information provided in this article are for illustrative and discussion purposes only and do not represent a recommendation or Australian Unity Investment’s view on future events, and in no way bind Australian Unity Investments.