U.S. assets stand tall in troubled world
Top Wall Street strategists reading the tea-leaves of the global economy have concluded that at a time of rising uncertainty, the United States is still a great place to invest.
The U.S. looks especially attractive as several European countries struggle with a debt crisis and painful process of fiscal rebalancing, said speakers at the Reuters Investment Summit in New York on Wednesday.
"There is a recognition that the United States, and dollar-denominated investments, are a pretty good place to be," said Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs. "Developed European economies clearly will grow more slowly than the United States."
That sentiment has been manifested recently in demand for safe-haven U.S. Treasury debt, but equities should also be a beneficiary, Cohen said.
According to a recent Reuters poll, some of the world's biggest money managers said they are maintaining a high exposure to U.S. stocks because of improving economic fundamentals and robust earnings compared with other equity markets.
"When bad things happen, investors still go to U.S. dollar assets and to U.S. Treasuries," said David Riley, group managing director for sovereign and international public finance at Fitch Ratings Ltd.
Riley said the flight to U.S. assets reflects the "unique role and status of the U.S. dollar."
Goldman's Cohen said that 1,250 to 1,300 points is "fair value and achievable" on the S&P 500 stock index, and that the current low-inflation environment could support higher price/earnings multiples for U.S. stocks.
The S&P 500 closed on Wednesday at 1,055 points, down 0.59 percent, but has rallied about 80 pct in the past year from a 13 year low in March 2009 as the U.S. economy began to recovery from the recession of 2008-2009.
Euro's Fate in Balance?
Europe's economy is struggling at the moment through the biggest crisis it has seen since the creation of the unified currency now used by 16 European countries, as some of its member states struggle with sovereign debt crises.
The ratings agency S&P downgraded Greek debt to junk status toward the end of April and also cut ratings for Portugal and Spain -- moves that helped push the euro to its lowest level against the U.S. dollar since 2006.
Strategists have started to openly discuss a chance that the euro as a currency system could simply fall apart.
"A disorderly breakup of the euro zone would have hugely negative consequences for the global economy," said Fitch's Riley.
Fitch is not forecasting such an outcome for now, Riley said. "Do we think the eurozone is going to break up in the near to medium term? No, we don't," he said.
Breakup or not, Europe's distress could linger for weeks or months, casting a favorable spotlight on the United States in the meantime. Riley said the U.S. rebound from a deep recession will not be upended by Europe's debt crisis: "We don't foresee any developments occurring in the euro zone that would materially threaten the U.S. economic recovery."
Buying Some Time
That will give the United States flexibility and time to start making the adjustments it needs to do to fix its own fiscal problems, he said.
Pumped up by spending aimed at pulling the nation out of recession, the U.S. budget deficit was a record $1.4 trillion last year and is projected at $1.6 trillion this year.
The United States "can not run trillion-dollar-plus (federal) deficits indefinitely" without having a negative impact on how the nation is perceived as a place to invest, Riley said.
Still, it may be another three years or more before those deficit worries start to increase, he added.
U.S. Federal Reserve Chairman Ben Bernanke also weighed in on the fiscal deficit on Wednesday.
In testimony to Congress, Bernanke warned that Europe's upheaval should remind lawmakers of the dangers posed to an economy with out of control finances.
If the U.S. doesn't craft a fiscal exit strategy, Bernanke anticipated "a lot of stress in the economy, and, in the worst case, would cause financial instability like we're seeing in Greece."
Thomas Lee, chief U.S. equity strategist at JPMorgan Chase, said U.S. equities should be a better bet than their European counterparts during what is likely to be a drawn-out process for various European countries to work out their structural problems.
"Europe may take five, six, seven quarters to really resolve itself," Lee said.
The S&P 500 stock index can still hit 1,300 by the end of 2010, Lee said. "My best guess would be we are making a bottom pretty early in June, and then we have a b rally."
The United States will mostly likely outgrow Europe not only in 2010 and 2011, during Europe's period of fiscal reforms, but on an ongoing basis, said Goldman's Cohen.
Europe has slower population growth and lower productivity growth compared with the United States, flowing through to lower growth potential, she said.
[Source: By Ros Krasny, Reuters, New York, 09Jun10]
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