An Englishman, an Irishman, a Welshman and a Frenchman found themselves snowed in in New York and unable to fly back home.
They decided to brave the early morning frost to look for a place to watch France play Wales in the Six Nations. France played badly and lost, as they did the week before to Italy.
Putting aside memories of apocalyptic snowstorms and rugby disappointments (mostly for the Frenchman) my recent trip to the United States has yielded a few interesting insights, some of them with potentially quite unexpected repercussions.
During our last visit, most managers were displaying an extremely cautious optimism, however now I was surprised to find they were cautiously extremely optimistic. This may look like a small detail but is definitely a huge improvement in investors’ mood in less than a year.
‘US Plc’ is in pretty good shape and corporate leverage is currently extremely low, far from the excesses of the pre-Lehman bust when debt-to-equity ratios were reaching 150 per cent. The level for this ratio for the S&P 500 is now close to 100 per cent, the lowest it has been for a long time.
With debt out of the system, there are two main reasons for this quite noticeable shift in sentiment. The first is the revolution in the energy sector coming as a result of cheap energy being increasingly available as a result of shale gas extraction. The second is the rebound in the housing sector. Because of its more immediate effect I will focus on the latter.
Year-on-year, housing starts are up by close to 40 per cent, building permits are rising fast, and with housing affordability at a record high, the recovery seems to be on a good track.
Residential property has historically made up 5 per cent of US GDP, but it is currently contributing approximately 2.5 per cent, suggesting the impact of a sustained recovery could be substantial. But alongside the direct impact, there is a knock-on effect as new houses need to be decorated and furnished.
This is where a little bit of lateral thinking can lead someone to achieve (or maintain, in my case) overexposure to emerging markets and, more specifically, China.
Statistics from the Federal Reserve Bank of San Francisco show that in the United States, for household durable goods, for every $100 spent by the US consumer, more than $20 is spent on goods ‘Made in China’. For clothing and shoes it is more than $35 out of every $100.
So all the new toasters being bought and the new wardrobes being filled will not only benefit US companies, but contribute substantially to Chinese growth.
The rebound in the US housing sector will therefore, I believe, have repercussions far beyond the domestic market, stretching out to Mexico, China and southeast Asian markets.
This will probably, in the short term, help support a Chinese recovery, which is now well established, and provide investors with tactical opportunities in the region.
In the long term it is likely that the proportion of ‘Made in the US’ products will increase as companies repatriate their production capacity, but in the short term the opportunity seems to be in the East.
François Zagamé is a fund manager at Old Mutual Global Investors