Whilst the US is entering ‘uncharted territory’ with the unwinding of quantitative easing (QE), investors should still be bullish about the country’s investment opportunities, according to Kully Samra, manager of Charles Schwab’s London office.
Samra noted the phenomenon of ‘onshoring’, where US manufacturing companies which previously moved their operations to countries such as China, are now moving them back to the US.
This benefits US states which had been declining for years.
This phenomenon is due, said Samra, to rising costs of labour and shipping in China. He estimated that where it was once 32 per cent more expensive to manufacture in the US than China, the differential is now 16 per cent.
This is leading to an ‘industrial renaissance’ in the United States, which will serve to drive economic growth.
He acknowledged that valuations ‘look expensive by historical standards’, especially for large-caps, but claimed this shouldn’t dissuade investors as the scope for recovery and low rate of inflation may allow companies to justify those valuations in the future.
Samra remarked that the industrial boom, coupled with the growth of fracking, mean the US will have to import less oil in future. These were not factors in previous periods of US prosperity, he argued, meaning that investors should not worry too much about valuations.
However, Samra described himself as only ‘leaning towards bullish’, rather than an outright ‘bull’ on the US economy at present, ‘due to the significant short-term risks’ associated with the forthcoming tapering by the US Federal Reserve of its asset buying programme.
He asserted that the markets have ‘priced in’ tapering, but that ‘nothing on the scale of the current programme has ever happened before, so there are risks from entering uncharted territory’.
But he noted that the Federal Reserve’s own estimate is that QE has contributed less than 0.3 per cent to growth over the period of its existence: ‘so why would a gradual unwinding of the policy have such a huge impact?’
Samra said that the unwinding of QE ‘should have happened before now’ as the economy is not as fragile as it was, ‘and we have now moved beyond the recovery stage and into the growth stage’ in the US.
He disclosed that Charles Schwab are ‘underweight’ in traditional ‘defensive’ stocks such as consumer durables, but are overweight on more cyclical sectors, such as technology stocks, as he believes these have the most potential to grow as the economy recovers.
Samra added that with stock markets and house prices rising ‘Americans feel wealthier’ and that this can contribute to increased levels of consumer spending, favouring ‘discretionary’ stocks.
He concluded his remarks by saying that ‘consumer confidence in the US is rising, and employment data is positive if you look over the four-month averages, so there is a lot to be positive about in the US market’.
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