The US economy has a number of attractions when it comes to investing. Photo / AP
The past 12 months in financial markets has reminded us that corporate earnings trends generally follow central bank policy.
As interest rates have risen, prospects for corporate earnings have fallen,
However, with a delay of about 18 months.
So, in an environment of volatility and uncertainty, is there such a thing as a “safe haven” for investing?
In my opinion, the United States, despite its many challenges, remains the key exception, at least among the larger and more liquid markets.
Now, I’m not suggesting that US earnings trends won’t follow the global currency cycle, but beyond that, the US continues to offer qualities that investors are looking for when considering long-term investing.
So what qualities should such a “safe haven” have? Five come to mind, and the US ticks those boxes.
• A large domestic market with a limited degree of global integration.
Of the major economies, the US, with its largely closed economy, remains the best equipped to deal with global shocks.
• Sufficient domestic resources (energy, hard and soft) that go into the above point. This ability to feed the population and fuel the economy fulfills this requirement.
There are some arguments that Australia and Canada meet these criteria to a lesser extent. However, Australia’s dependence on China for exports of commodities (including iron ore) is well documented.
• The depth, liquidity and resilience of their domestic financial markets.
While there is an ongoing debate about the end of the USD era, it remains the only viable global medium of exchange and store of value without being remotely eclipsed by other currencies (domestic or crypto).
This doesn’t mean it isn’t subject to market downturns, but it remains the default currency in a “risk-off” environment.
• Relatively flexible labor and product markets.
As government intervention increases everywhere, US markets remain by far the most open and flexible.
• Political and institutional stability.
This may seem more controversial in a post-Donald Trump era, as the country is constantly on the brink of upheaval. Historically, however, it is one of the very few nations with a presidential system backed by the House and Senate process that supports both democracy and business.
The checklist explains my positive stance on US investing over the long term. It’s the only major secular (not just cyclical) market with a lead in most industries and technologies. It also explains the USD’s continued strength despite social and political challenges.
In a world of extremes, I would continue to seek the diversification advantage that US investing provides.
• Mark Fowler is the Head of Investments at Hobson Wealth. This article contains market commentary and factual information only and does not constitute financial advice.