The United States remains the world’s most significant economy and, as Australia’s third-largest trading partner and with various ASX-listed companies with North American operations, conditions in the US invariably impact on the local economy and equity market.
On a recent trip to the States, I spent time attending various company investor days, investment conferences and a series of face-to-face meetings with US executives and Australian listed companies with local operations. From this vantage point, I gathered a range of valuable investment ideas and insights into the world’s largest economy.
Overall, the world’s largest economy is robust and the outlook is generally positive in our view. However, the US economy is a two-speed story. The economies of states dominated by old industries remain subdued. Meanwhile, new age states and regions (such as Silicon Valley) are growing strongly, boosted by new economy companies such as Facebook, Amazon, Netflix and Google (the ‘FANGs’).
It is worth noting that disruptive businesses are continuing to make their presence felt across the US economy. Disruption is impacting various industries, including retail, with the likes of Google now extending their presence into the online grocery space.
There are strong signs inflation (excluding food) is again rising and the labour market is strengthening. With a mini infrastructure boom underway, Texas is suffering from a shortage of construction and skilled workers, an experience which is repeated in other parts of the country. These conditions should drive wage inflation of around two to three per cent which in turn, should hopefully lead to an increase in discretionary consumer spending.
With a little over four weeks until Americans head to the polls, the upcoming presidential election is dominating discussion on the streets and in boardrooms. The market’s ubiquitous view seems to be that neither candidate is particularly good. Voters appear more focused on regional Senate appointments to achieve change rather than the nation’s leader.
For the first time in history, the race to the White House has become a major national event. Millions of people are watching the election coverage, including last week’s presidential debate, which was the most watched in history. Interestingly some commentators are attributing the latest decline in consumer spending to Americans staying at home and tuning into the election, as well as the Olympics, rather than going out and spending. As I overheard one New Yorker describe, “this election has turned America into a reality show, and we can’t wait for the finale.”
In our view, a Trump victory is a less likely outcome after the recent presidential debate. As the Wall Street Journal advert proclaims, “America’s politics is everyone’s business” and, if Trump does win, it would have an adverse impact on markets globally, including Australia’s bourse. However, we believe the effect on markets would be short-lived.
US online sales have surged 17.0% in the last quarter while mobile commerce surged 59.0%. Free shipping and free returns now offered by many retailers is driving a boom in apparel sales. Almost everyone you talk to has an account with Amazon Prime which guarantees purchases are delivered to consumers within two days of purchase within the US for an annual fee of $79. As the costs of fulfilling orders rises, competition from Amazon Prime is crushing smaller online retailers. Interestingly, while 19.8% of online sales are now via a mobile device, according to latest research the more expensive an item, the bigger the screen a consumer needs to make a purchasing decision.
With the US historically a world leader in online shopping, these trends will undoubtedly impact Australian retailers and consumers in time.
Real estate boom
While the upper end of the property market is soft, demand for affordable housing is strong. The demand is supporting sustainable growth with home buyers staying within their means, rather than excessively levering purchases.
The outlook for the US housing market is positive with continued growth likely in 2017. After hitting lows in 2012, property prices should see continued and stable increases driven by the bottom-end of the market. Rather than being limited to pockets of the market, the boom appears to be broad based.