All the US stars are aligned: its currency is still cheap, its technological leadership gives the country a serious advantage in the digitisation revolution, and it is also leading the energy change, which is bringing the benefits of lower input costs and less reliance on foreign oil.
Moreover, the Fed intends to remain very accommodative; it has announced it wants to wind up its QE program in October, but who would have dreamed of a central bank still printing money five years into a recovery? Also, the Fed is keeping a close eye on the normalisation process of the yield curve and won’t allow a shock that would trigger a sudden and sharp rise in rates in the US. So visibility is good and the cost of capital will remain minimal for a long time; this should encourage more and more corporations to invest and keep hiring in order to take advantage of the economic growth.
The mood on the US stock market is likely to stay buoyant despite some minor corrections. This is because corporations are doing pretty well and earnings growth is almost twice as high as nominal GDP growth, notably thanks to share buybacks. Also boosted by brisk M&A activity, it seems equities should continue to thrive, with some further P/E expansion – especially as bonds are still very expensive compared to equities. Investors will therefore continue to favour companies with high expected growth, given the currently sub-par growth rate. In this environment, firms that are able to monetise the traffic on their websites will continue to prosper.
In contrast, Europe seems to have lost its momentum and is still a weak spot. The risk of “japanisation” is growing, as the eurozone is fighting against slow growth and the threat of deflation. In spite of the ECB’s new policy of supervision over big banks’ bonds and strong political will, the euro’s governance is weak and its constraints are still greater than its advantages; as deficits continue to deepen and growth to stagnate, the ECB seems to be unable to kick-start credit and boost confidence. With Ukraine still weighing on the eurozone’s economy, we are bearish on the euro – especially since Mario Draghi’s announcement, on 4 September, of an asset-backed securities (ABS) purchase programme along with an unexpected cut in interest rates. These emergency measures are intended to counteract the deterioration in economic activity and the collapse of inflationary expectations and to boost demand and capex. But whether they succeed is another matter.