Your IndustryMar 2 2015

US Equities - March 2015

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Approx.50min

    US Equities - March 2015

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      Introduction

      By Nyree Stewart
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      Furthermore, in recent months the effect of lower oil prices has meant US consumers have had more disposable income, helping the economic outlook of the country remain positive.

      This is in spite of the fact that inflation continues to undershoot the government’s 2 per cent target. The minutes from the latest Federal Open Market Committee (FOMC) meeting in January point out total inflation, as measured by the consumer price index (CPI), was 0.75 per cent for the 12 months to December 2014, while core CPI inflation was between 1 and 1.5 per cent.

      It states: “The staff’s forecast for inflation in the near term was revised down, as further sharp declines in crude oil prices since the December FOMC meeting pointed toward a somewhat larger transitory decrease in the total PCE [personal consumption expenditure] price index early this year than was previously projected.

      “The staff’s forecast for inflation in 2016 and 2017 was essentially unchanged, with inflation projected to remain below the committee’s 2 per cent objective.”

      Although many expect the Federal Reserve to increase interest rates towards the middle of this year, the FOMC has emphasised in official statements that any monetary policy decisions will be data dependent.

      It stated that even when employment and inflation near mandate-consistent levels, “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run”.

      The Fed is therefore unlikely to do anything too drastic in case it disturbs the market equilibrium. Meanwhile, lower energy prices and rising employment are providing a tailwind for the domestic market that could help the US economy continue its positive trajectory.

      But there are concerns that the recent strong performance in US equities could mean there are better options elsewhere.

      Kully Samra, managing director, Charles Schwab UK, notes: “The US economy appears to be in a self-sustaining phase of the expansion, which could mean more volatility as the Fed embarks on a tightening cycle. We remain confident the secular bull market is intact, but volatility has risen and we suggest investors who are overexposed to US equities consider global diversification, with a preference for emerging markets.”

      For James Dowey, chief economist at Neptune, the key question remains the timing of monetary policy tightening by the Fed.

      He explains: “The ongoing fall of the oil price has perhaps skewed the risk… towards a slightly later rather than earlier hike. But the deflationary impetus from oil is transitory and the boost that cheaper oil is providing to demand, and hence jobs via the improvement in household finances, is likely to be really quite large.

      “The real question does not concern the first hike but rather how steep the path of further hikes is thereafter. We believe at present the market’s expectations for this path are far too dovish.”

      With the FOMC also noting that international developments are factors in its monetary policy decisions, the US market could contain some surprises in 2015.

      Nyree Stewart is features editor at Investment Adviser

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