By BILL BLEVINS [email protected]
Bill Blevins is the Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.
After shrinking for four consecutive quarters, the world’s biggest economy produced its strongest growth in two years.
Over the third quarter of 2009, US gross domestic product (GDP) expanded by a healthy 3.5 per cent (annualised), marking the end to the worst US recession in 70 years.
The result was better than analysts had hoped, which contrasted with recent UK data where GDP was unexpectedly still in decline.
In the US, a strong positive GDP reading unofficially marks the end of a recession, although officially the starts and ends of recessions are declared by the National Bureau of Economic Research, which probably will not declare this one over for a few months. The official end date is not normally announced until months after the actual recessionary period ends.
While it may not be official just yet, the fears just a few months ago that the US economy was in a “Great Depression” have proved unfounded – something which share prices have been telling us since spring.
The US economy was boosted by government support schemes for the motor, financial and industrial sectors.
Residential real estate investment rose 23.4 per cent – a major surprise and an indication that there is light at the end of the tunnel for the housing industry.
Growth is likely to slow over the next quarter. Some of the largest components of the growth between July and September came from spending on automobiles and house building – areas propped up by federal programmes which have now expired.
It is also unclear if businesses and consumers have regained enough strength to propel the economy on their own. Businesses are still cautious and households are still in debt, two factors that economists warn will result in noticeably slower growth in the coming months.
Nonetheless, this does not diminish from the fact that the US government’s efforts to stimulate the economy have been relatively successful, and that the US economy is now on the path to recovery. While it may not keep growing at 3.5 per cent a quarter, it should still keep growing.
A large portion of the stimulus funds are still pending, so there is significant potential for further sustainability for the recovery.
US inflation remains relatively low, giving the Federal Reserve Bank leeway to keep interest rates at low levels for some time, which will further aid the economic recovery. On November 4, the Fed signalled that it expects to leave rates near zero for at least six months.
The housing market is at or near the bottom. Manufacturing and consumer spending – while they still have some way to go – have recovered from the deepest levels of the downturn.
In another sign of economic recovery, the National Association for Business Economics said the number of employers looking to hire workers over the next six months exceeded the number expecting job cuts for the first time since December 2007.
From an investor’s point of view, slower growth over the next quarter, even a temporary decline, should not necessarily derail the stockmarket recovery as the market will be looking further ahead. If anything, this quarter’s positive results helps to solidify the view that we are in a bull market rather than a large bear market correction.
The US growth is in sharp contrast to the UK, where the economy contracted by a further 0.4 per cent over the quarter – a surprising decline as a return to modest growth had been expected.
The continued weakness of the UK economy need not be too much of a worry for global investors. The UK only represents four per cent of global GDP, so it is not significant enough to derail the larger economy. Investors should not let a contraction in what is a relatively small country scare them from shares.
While British investors tend to be inclined to buy British company shares, the different fortunes of the US and UK economies is a good example of the importance of having global diversification in your share portfolio. With the UK representing a small part of global GDP, I would normally recommend that you only allocate a part – and not the biggest part – to UK shares. You may even wish to leave UK shares out completely for the time being, and concentrate on US, Continental Europe and Emerging Markets instead.
Besides selecting funds or shares covering various specific regions, you could also include a world equity fund in your portfolio. The fund managers aim to identify companies that will perform best in each industry, regardless of where the company is based. They can look at industries in their entirety and compare companies to their competitors, wherever they may be, and take advantage of cross-border mis-pricings.
Overall, the general consensus on recovery continues to be reasonably strong and we are in a favourable environment. Although it looks like a ‘jobless recovery’ could ensue, this should not impact equities negatively as ironically it will increase company profitability in the near to medium term.
Even after the strong stockmarket runs we have already seen, there is some scope left for further gains, primarily driven by positive earnings developments and receding risk appetite, as well as a bit more room in valuations.
Professional and authorised advice from firms such as Blevins Franks Financial Management is a necessity when setting up the asset allocation in your portfolio to ensure that it meets your investment objectives and risk tolerance.
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