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Emerging markets will trigger US upswing, says Wells Capital

‘I think we are going to be surprised by global growth and the feeling that it is a sustainable recovery,' says Wells Capital's chief investment strategist.

 
Emerging markets will trigger US upswing, says Wells Capital

US economic growth could surprise on the upside next year, driven by growing emerging market demand buoying the manufacturing sector, according to Wells Capital Management’s James Paulsen.

The $319 billion group’s chief investment strategist said US GDP could expand by 3% next year, significantly above the 2% consensus expectation, with an upswing in consumer confidence resulting in the wall of money parked in cash and bonds starting to flow back into equities.

US gets back into gear

Third-quarter GDP came in at a better-than-expected 2% on an annualised basis, up from 1.3% in the second quarter.

‘I think we are going to be surprised by global growth and the feeling that it is a sustainable recovery. The big catalyst will be a turn in emerging market economies,’ he said. ‘It’s important because if that happens, the $2 trillion on corporate balance sheets will come into projects as we see a rise in confidence.’

Paulsen told the audience at an investment conference that the slowdown in emerging market economies over the past 18 months had been policy-led. For example, China has eased its monetary policy by steadily reducing the amount its banks have to hold in reserve, allowing them to lend more. Paulsen said moves like this all but eliminate the chances of the global economy sliding back into recession.

‘We’ll worry less about the eurozone if emerging markets are growing. It will revive the manufacturing sector, which led the last recovery for the first time in years,’ he said.

'Marshall Plan' pays dividends

He said the US is now reaping the benefits of what was effectively a Marshall Plan-style programme of building up emerging markets at the expense of its domestic manufacturing sector over the past two decades.

By having an overpriced dollar and outsourcing the production of goods overseas to countries that have low labour costs and negligible employment and environmental laws, the US ran with a significant trade imbalance to support the development of new trading partners.

‘We are seeing a major switchback,’ Paulsen said. ‘Now the emerging markets have free floating currencies, give workers benefits and have to adhere to environmental rules, some of that manufacturing is coming back.

‘So if the US was growing by 3% but losing 1% of that through the trade imbalance, if manufacturing starts to add 1%, eradicating the trade imbalance would equate to a 2% swing in GDP.

‘That is huge. They have a young demographic and we get a big piece of that market, which will help us balance the public deficits and bring down unemployment. We created a new world asset through this emerging market Marshall Plan and we will get the trade balance back from a lot of countries.’

This improvement in trade and particularly sales to emerging markets reduces Paulsen’s concerns about the US fiscal cliff – a looming combination of tax rises and spending cuts – which he says is one of a series of problems since 2008, including the financial crisis and Lehman Brothers, the housing market and stalling economic growth.

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4 comments so far. Why not have your say?

Geoff Downs

Nov 07, 2012 at 12:41

He just want's us to invest in these risky markets. The stock markets can't rise without new money coming and creating more buyers than sellers.

He barely touches on debt, perhaps he doesn't think that's important.

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William Bishop

Nov 07, 2012 at 16:26

True, but in a broader sense QE has been injecting a lot of surplus liquidity into the system, some of which marginally percolates into markets, including stock markets. If it was not for this, share prices would have been generally lower. While this kind of support may still be continuing, perhaps most of the beneficial effect has already occurred.

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Geoff Downs

Nov 07, 2012 at 16:41

I agree with that William. My view is that the economic signs are actually worsening, despite QE. In that respect the fundamentals and stocks are not indicating the same thing.

The European position is no better, China is having a more difficult time and the US earnings have been generally poor.

The UK position also looks still pretty uncertain. I think the markets are rising on the belief the US has turned the corner. Despite massive stimulus the economic recovery is tepid at best.

We are being told all markets are relatively cheap. Even if that were true in a bear market they are likely to get cheaper. On top of that the debt problems, worldwide, are not being dealt with.

People may still make money in these markets but the risk is really to high.

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William Bishop

Nov 07, 2012 at 18:57

Stock markets are clearly cheap compared to bond yields, but they have not (except perhaps briefly in late 2008/early2009) ever been absolutely cheap the way that they were in the late 1970s/early 1980s. Do we still need to go back there before we hopefully see the start of a new long-term upswing?

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