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Why the Bears Are Wrong… Again
Posted by: Yiannis Mostrous (IP Logged)
Date: August 10, 2012 11:49AM
Since the beginning of the year, being bearish and trashing the global economy has been the favorite pastime for the majority of market observers. Recurring negative themes have been the sluggish US economy, the supposedly imminent demise of the euro and the slowdown in growth of China’s gross domestic product (GDP).
Let’s debunk today’s “Chicken Little” attitudes, one by one.
The U.S. economy is steadily (if not spectacularly) growing; the market certainly is more optimistic than the pundits. The S&P 500 index has gained around 10 percent so far in 2012 and another 3 percent to 5 percent upside for the rest of the year can’t be ruled out.
To be sure, the so-called “U.S. fiscal cliff” of tax hikes and budget cuts that loom on 2013 is a clear longer-term danger for the US economy. However, employment is holding up, albeit at a disappointing pace. If jobs growth is sustained, it should facilitate future income growth.
Meanwhile, from a macro perspective, the key for the future of the US economy is the country’s increasing energy independence.
Earlier in the summer, ConocoPhillips (COP) CEO Ryan Lance said that North America could be self-sufficient in oil by 2025. If true, this development would improve the US trade balance and boost GDP growth.
Robust domestic production of natural gas is also pushing down gas prices, a big positive for consumers. Lower energy prices will allow the US economy to re-industrialize, adding another dimension to its grown potential.
Major European companies are already opening or planning to open new factories in the US, to take advantage of this energy sufficiency and lower prices.
As for Europe, my view remains that the markets are gradually pushing the leaders of the euro zone to act more decisively in resolving the Continent’s sovereign debt crisis. Although the EU still faces many daunting long-term problems, the crisis is easing over the short term.
Greece continues to be a basket case, but Italy is now running a trade surplus and Ireland a significant current account surplus. Spain also seems to be on the right track in fixing its economy.
Remember that the problem in Europe is not the size of the debt but rather its distribution. Some countries have more debt than others. As a whole, EU’s primary budget is a quarter of U.S. levels, the total amount of debt is below Japan and the UK, while the current account is in balance.
As for China, it’s true that the country’s “go-go era” of double-digit GDP growth is over, but its economy will continue to deliver growth of about 8 percent for the foreseeable future—a pace that most countries would envy.
Although the Middle Kingdom must grapple with many long-term challenges, investors should shun the overly pessimistic notion that not only the country’s economy but also its society is on the brink of disaster. For now, my view remains that the Chinese economy will deliver solid growth this year, especially if the infrastructure projects originally scheduled for 2012 are firmly back on track and residential property recovers in the second half.
The upshot for investors? Staying with equities for the rest of the year will prove to be a profitable bet.
I especially like banks with large emerging market footprints such as UK-based Standard Chartered (London: STAN); energy stocks such as Italian-based ENI (E); and well-managed insurance companies such as German-based Allianz (OTC: AZSEY). Value hunters should look at European big-cap pharmaceutical companies such as Sanofi (SNY); well-positioned food retailers such as Ahold (AHONY); and innovative software suppliers with huge growth potential, such as SAP (SAP). For more Asian stock picks, check out Best Asian Stocks to Buy Now.
Stocks Discussed: ENI, AZSEY, SAP, AHONY, SNY,
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