US: new growth motors With GDP growth averaging more than 2% a year since 2009, the US economic recovery is taking hold..…
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There are now strong signs suggesting major structural changes are underway. Previously upstaged by issues like the fiscal cliff, the debt ceiling and concerns over automatic spending cuts, US companies can now rely on improved competitive edge, long term visibility and a revival in bank lending to grow, invest and hire, ushering in a virtuous cycle of consumption and growth.
Sharply improved competitiveness
The word competitiveness is on everyone lips in Europe but the US has already rolled measures out rather than just talking about it.
Its competitive labour costs are already a fact. Due to difficult labour market conditions, unit labour costs have only risen very slightly and are now very attractive once again. This is especially true compared to the situation in China which was for a long time viewed as a haven of low-cost labour. But social changes there have led to a fourfold increase in average wages in 10 years. This has resulted in so-called reshoring where US companies like General Electric have repatriated some of their production. In some cases, reduced labour costs from relocation are no longer compensating for disadvantages linked to logistics and transport costs, productivity, adequate control of processes and production, flexibility and legal risks.
An industrial rebirth
One long term driver of US growth is shale gas and oil. The US has huge reserves, so much so that the country could be energy independent by 2050. This has had an immediate impact on prices which are now much lower than abroad. US gas, for example, is currently trading around USD 3.5/MBTU (one million British Thermal Units) compared to USD 12 in Europe and 18 in Japan. Such low prices benefit numerous industrial sectors like petrochemicals where energy can represent up to 30% of production costs. But all energy-guzzling sectors like metallurgy, cement and glass will enjoy an obvious competitive advantage on international markets.
This industrial rebirth should contribute largely to GDP but also help to mop up US unemployment. An estimated 500,000 jobs have already been created in 2 years thanks to shale gas and oil. Estimates suggest every new job creates 3 or 4 indirect jobs and the Boston Consulting Group reckons that 2.5-3 million industrial jobs will be created by 2020.
The property market upturn is driving confidence and visibility
In a sure sign that the US economic revival is solid, the property market is recovering. The NAHB index is back to pre-2007 levels, testifying to renewed confidence among sector professionals. This is hardly surprising as the construction sector, which slumped after the subprime crisis struck, has been showing signs of vitality in recent months. Housing inventories are at an historic low and both housing starts and new building permits have rebounded. Property is by definition a long cycle so this recovery is very promising for the entire US economy. Property developers are confident, which is excellent news for jobs, and household sentiment is equally upbeat. Owning a house in a sound market makes people feel wealthy and encourages them to spend precautionary savings. And lending conditions are particularly attractive today.
Cheap loans and a recovery in investment
Credit institutions have restructured and cleaned up balance sheets. With fewer toxic assets, more capital, a liquid interbank market and a revival in confidence, the conditions are right to take the brake off lending. This is good for property but also for private investment which is now trending higher but still running below its historic mean.
A winning cocktail for US companies as fundamentals return to centre stage
The financial crisis led investors to behave irrationally, leading to knee-jerk reactions to risk. They switched massively to low volatility stocks even if buying defensives meant acquiring companies trading on very high PEs. At the other end of the spectrum, cyclicals are at a low. And yet fundamentals are good and, as we have seen, investment is starting to revive. Ultimately, it all boils down to visibility and that, just like risk perception, is changing. For example, the cleaning up of the US economic tissue could well end in upward revisions of growth and finally help these undervalued stocks catch up. Now that looking for safe havens is no longer a priority, investors are beginning to tire of buying treasury bonds with practically no yield and should logically end up seeking out securities with a more interesting risk/return profile. This could make 2013 a very good year for the Value investment approach.
Source: Edmond de Rothschild Asset Management
