FYI | Oct 21 2009
By Chris Shaw
The Dow Jones Index crossed through the 10,000 point level again last week, which according to SVB Asset Management chief investment officer Joe Morgan was not only a positive from a milestone perspective, but a justified move that can continue in the near future.
As Morgan points out, economic data continue to suggest the US economy has hit rock bottom, meaning the only way is up from here and this is a positive for the stockmarket given it acts as an indicator of future expectations. He suggests if there is a quick turnaround or even a slightly faster one than currently anticipated for the US economy, it can be argued stocks still look quite cheap despite the market being up 23% for the year and a more impressive 63% from its low in early March.
The gains may also tempt people back into the market in his view as there remains a significant amount of cash, as much as US$3.0-$3.5 trillion on his estimates, sitting on the sidelines that should be re-invested into markets where better returns are possible. This implies stronger demand for equities and the potential for this demand to outstrip supply is enough to suggest the market could continue to rally through to the end of the year, even if the economy doesn’t show any real sign of improvement.
The other big talking point with respect to the US economy of late has been the weakness in the US dollar. SVB’s senior FX advisor Dave Bhagat points out, in most cases the greenback’s losses have been relatively modest with the main exceptions being against the Australian dollar and the Brazilian real.
The weaker currency will produce some benefits for the US as Bhagat notes it will boost exports and act as a disincentive for consumers to buy imported goods, which should act to reduce the US trade deficit and therefore boost GDP. The potential downside is higher inflation risk but in Bhagat’s view that is not a concern for the short-term.
China also stands to gain from a weaker US dollar in his view as with the Chinese currency essentially pegged against the US dollar it has effectively depreciated against most other currencies, creating a significant boost to China’s export competitiveness. This has helped its economy return quickly to a stronger growth profile.
For the rest of the world though the weaker US dollar is a tax on exports to the US, but even this may not be a major issue according to Bhagat as he suggests the likes of the EU are more concerned with the boost China is receiving from its effective currency depreciation than the benefits accruing to the US. This is because China’s share of EU trade is growing strongly thanks to its undevalued currency.
While the EU is likely to become more vocal in its protests about a weak US dollar if the trend continues, Bhagat expects nothing will be done as the US is unlikely to intervene unless the greenback nosedives. China is seen as unlikely to act before its growth returns to the 9-10% range and unemployment has fallen.
Longer-term what could happen, in Bhagat’s view, is given the world is now aligning into three trading blocks – the US, Europe and Asia, the latter region is likely to want greater control over its monetary policy as its share of global GDP increases. This implies the region will at some point de-link its currencies from the US dollar, which should see Asian currencies appreciate. It should also reduce the US dollar’s reserve currency status, but this is likely to be a development that takes years to play out in Bhagat’s view.
