Knocking the US is always fairly easy as long as Goldman Sachs and other US banking and investment giants are around, with plenty of other participants introduced to the sport once Freddie Mac and Fannie Mae introduced the sub-prime mortgage crisis.
But when talking about a global financial crisis, it is essential that investors make a very clear distinction between the mortgage crisis that kicked off in the US and the current European debt crisis. Investors like M&G’s Richard Woolnough has already done so and is clear on which one brings about the better investment opportunities.
The US has had to contend with its relative weakening thanks to the rise of emerging markets, with China’s economy expected to overtake the US as the world’s largest by at 2050 at the latest.
Investors, however, should take heart from how the US is steering its path through the financial crisis; and this despite the political stand-off and the abject failure of the Joint Select Committee on Deficit Reduction (the ‘Super Committee’) last year that largely led to it losing its AAA rating.
To date, there is still no sign that there is an end to the crisis in Europe, with more countries being added to the list of those struggling to pay down their debt.
On Europe, Dinning says: “In particular, we take the recent weakness of the euro as encouraging on a number of levels”, concluding “…the ECB is signalling that it will give banks the kind of support that should prevent a European Lehman Brothers happening”.
But this is slow progress and there are still too many uncertainties in Europe so Woolnough, among many, doesn’t own a lot of it. Instead he talks more positively about the US, saying he would much rather be where the crisis is further along the path to recovery.
Manufacturing employment is growing faster in the US than any other developed country since 2010 and the start of the recovery, including Germany – the more bullish are hoping this recovery is sustainable; its labour costs are falling (down 11% between 2002 and 2010 in dollar terms compared to a rise of 41% in Germany).
“If the US gets housing going, gets construction working, it will help banks’ balance sheets and US employment as well as Obama’s re-election,” he argues.
Wealth managers often talk about any geographical allocation in their client portfolios being a result of their investment decisions and not a key driver of them, so the shift away from Europe towards the US could be a significant output for portfolios in 2012.
