Aren’t you sad that the London Olympics are over? Neil Young’s After the Gold Rush, released 42 years ago this month, sums things up perfectly – “children crying and colours flying all around the chosen ones”.
Having basked for a couple of weeks in the golden surprises of UK sportsmen and women winning more gold medals than anyone predicted, and watching good news headlines on the telly for a change, we are now back to “auld claes an’ porridge”.
Last night I watched the news. The presenter started off with “good evening” and then proceeded to tell us why it wasn’t. Apart from the multiple deaths in Syria and Afghanistan it seems the banks will restrict access to basic banking is in deep soapy bubble. Apparently its GDP shrank 0.2 per cent in the last three months.
Do you ever wonder how they calculate these things? What is GDP anyway? We’re told it’s a measure of economic activity, but how do you go about measuring it?
Last month it was announced that Scotland’s GDP shrank 0.1 per cent. Shock horror! Presumably that’s an estimate, so there should be a sampling error but we’re not told what it is. But no matter – is 0.1 per cent a big deal? What’s 1/1000 of a fish supper? It’s not even a chip!
What we haven’t been told is that economic experts were recently forced to admit their original estimates of US GDP growth was wrong. And that’s not the first time. Their first attempts put it at 1.5 per cent up over the quarter to June but, having studied the numbers again, they’re only 67 per cent out. They’ve now decided that it was up 2.5 per cent in that quarter. They tell us that ignores inflation, so it’s real. I say it’s time they joined the real world, because when we shop we can’t ignore inflation.
So what caused the surprise? US imports have gone down and exports are now at record high levels. How is that, in an economy that’s supposed to be struggling? Well it turns out that exports to China and the eurozone grew by more than 10 and 6.3 per cent respectively.
How is it we’re told that China is struggling and Europe is shrinking when demand for American goods is booming? That doesn’t add up either.
But is there any meaningful relationship between GDP strength or weakness and stock market returns? Everybody seems to think there is. But not according to a detailed study carried out looking back over the 100 years to the year 2000. And it’s the same conclusion from other studies over the last 30 years covering developed and emerging country stock markets. These studies prove that the highest real stock market returns always come from slower growing GDP countries.
I’m not suggesting the answer is simply to fill your boots right now with Greek shares. But there must be other indicators that are better predictors of stock market returns in future. And from studying them I can suggest that the US stock market will continue being a gold medal winner for the next decade and beyond.
Oil and natural gas discoveries in Texas and especially North Dakota are transforming the country. Manufacturing and domestic costs are dropping substantially. North Dakota’s oil production has grown by more than 70 per cent in the last few months alone. The US intends to self-sufficient in all energy needs within five years. Imagine what what’s going to do to trade deficit and profitability.
Baby-boomers aren’t retiring as fast as pessimists predicted. An even bigger cohort is about to explode the demand for goods and services in the US – Generation Y.
US car manufacturers are selling record levels of cars and have now paid off all their debt to their government. Many firms are sitting on vast piles of cash, technological advances continue to accelerate and profits continue to defy the pessimists.
The last 12 years have been pretty challenging for equity investors, but it’s in equities that the real value lies right now. It doesn’t lie in perceived safety.
Most UK investors are probably underweight in US equities. So if you are, it’s time to recognise that the gold medal table for equity investment for many years will have more than its fair share of US champions.
• Alan Steel is chairman of Alan Steel Asset Management
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Weather for Edinburgh
Friday 24 May 2013
Temperature: 3 C to 13 C
Wind Speed: 20 mph
Wind direction: North east
Temperature: 7 C to 17 C
Wind Speed: 13 mph
Wind direction: West