Investing in the U.S.
PART 2: The world's most stalwart economy may be trending downward; however, few would argue that the U.S. will ultimately recover. For investors, today's forces have opened a signficant window of opportunity.
For Canadians investing in the U.S., revelations of plummeting home prices, rising foreclosures and declining consumer confidence are worrisome. Will the world's largest, most stalwart economy resist the downdraft?
"The U.S. economy is primarily driven by domestic demand," says Peter Hall, vice president and deputy chief economist at Export Development Canada. "The external (export) sector in the U.S. is much smaller than it is in the Canadian economy, so investment prospects inside of the U.S. are really governed by the state of domestic demands. The American consumer is 70 per cent of the U.S. economy, so also has a lot to do with the state of global growth."
Consumers in the U.S. import a lot of what they consume, says Mr. Hall, and that has a direct impact on many economies around the world. "Where are U.S. consumers at the moment? Well, their personal finances are stretched thin. Unlike in Canada, their houses are typically used as a source of liquidity. American consumers are able to dip into their home equity as a source of financing for consumer expenditures. The reason has to do with their tax structure: the incentives built into the tax system favour never owning your house, but continuing to dip into home equity to use for consumption purposes."
That means that the state of the housing market is very relevant to consumer spending, and new residential construction has fallen from more than two million units per year, as recently as 2005, to about a million units annually today. "That fall in construction activity is symptomatic of the duress that the housing sector is under. There was a long period of over-consumption of housing. It was an unsustainable excess, so simply put, the U.S. housing market is in a period of quite dramatic retrenchment."
While there is no arguing that the economy and markets are on a downtrend, says Mr. Hall, the unknowns are the timing of the market bottom and recovery. "When you put the numbers together, we're talking about a very marked change in spending behaviour for at least the next 18 months."
Mitigating the housing market influence is the significant depreciation in the U.S. currency over the last 18 months. "It is essentially breathing life into the export sector, particularly the beleaguered U.S. manufacturing sector, so there are opportunities there to get involved in the revitalization."
For investors, these forces present a significant window of opportunity. Aaron Brickman, director of Invest in America, U.S. Department of Commerce, says, "We have 42 per cent of the global consumer goods market and 34 per cent of the global luxury goods market, so there is a compelling case - whatever a company is selling - that the market will be here.
"It's important to remember that the U.S. consists of 50 strong individual states comprising a single market, says Mr. Brickman. "We have 50 states with their own story to tell, all of them welcoming. Foreign investment comprises about 11 per cent of the economy as a whole, and about 32 per cent to 33 per cent in manufacturing. At the same time, there's a lot of investment in high-tech and in research and development. Investors are taking advantage of all of the best qualities that our workforce has to offer, which is very exciting. (Whatever the current climate) business and investment decisions are not made on a minute-by-minute or a day-to-day basis - what makes good business sense today must make good business sense two years from now."
Despite a slowing economy and volatile markets, the U.S. continues to attract capital. David Bohigian, assistant secretary for Market Access and Compliance, International Trade Administration, U.S. Department of Commerce, says, "The United States continues to be the most open major economy and provides the best risk adjusted return in the world. We know investors continue to recognize the unique strengths of our unparalleled workforce, dynamic consumer markets and innovative product development and manufacturing."
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