In the coming months, the US has the almost impossible task of slowing domestic consumer spending wi...
In the coming months, the US has the almost impossible task of slowing domestic consumer spending without damaging broader economic growth, according to Bill Mott, UK strategic advisor at Credit Suisse Asset Management.
The problem is that even if the authorities manage to achieve their goal, a positive outcome has already been largely discounted by the markets.
He feels that the US government and the Federal Reserve have probably reached the limit of the help they can offer the economy through fiscal and monetary stimulus, both of which are at unprecedented levels.
"If fiscal and monetary stimulus continues, the Fed risks falling behind the curve," Mott warns. "That would see inflation leap and a real collapse in the dollar. If the Fed hikes interest rates, consumer spending will stop and the economy will stumble.
"There is still massive overcapacity, while the global recovery is not yet assured. We see an attritional sideways market for several years, or a serious setback for the US."
However, asset managers at Invesco Perpetual believe there is a lot of bull in this bear market, and draw parallels between now and the early 1990s.
"Then investors were coping with the US savings and loan crisis, financial scandals surrounding Michael Milken and Ivan Boeksy, the bombing of the Pan Am flight over Lockerbie and an imminent war in Iraq," notes fund manager Ian Brady. "A decade later we are recovering from the 'tech wreck", the consequences of the September 11 bombing in New York, corporate malfeasance and another war in Iraq."
The collapse in capital expenditure in the last three years is another parallel with the 1980s, but only 18 months after a supposed corporate credit crunch, free cashflow margin and real cashflow yield is at a 50-year high, Brady adds. In the corporate sector, capital spending as a share of revenues and property, plant and equipment is at a historic low.
"Corporate US is in good shape," he says. "But the consumer outlook is less clear. There has been record spending in the last 18 months and debt is at all time high."
Thomas Diggenan at UBS Global Asset Management is cautiously optimistic about the US equity market, which he feels is close to fair value at the moment. He is keen to emphasise that investors should not be distracted by the political noise that typically precedes a presidential election.
"The market is close to its pre-bubble peak and we would rather be here than where we were four years ago, because there is more opportunity to outperform," Diggenan says.
He believes the US Federal Reserve will to keep interest rates at their current historic low until employment strengthens. US corporate profits continue to improve, despite warnings of a dip in the future.
"We heard that warning in 2003 and the market ended up by 30%. The fact is, the outlook is never as good as it looks at the top and never as bad as it looks at the bottom. The quality of earnings from 1998 to 2000 was very poor, but that was written off in 2000/01."
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