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Regional outlook – U.S. • Ray Mawhinney • Brad Willock, CFA
which should help stimulate their
economies during the second half of
this year.
In the near term, the prospect of a
Greek exit from the Eurozone will
likely keep markets from making too
much progress. In the medium term,
U.S. markets will be influenced by the
presidential elections scheduled for
November and the expiration of tax
cuts and other stimulus measures on
January 1, 2013. This so-called fiscal
cliff could hurt gross domestic product
to the tune of 3% to 4% if all items
are allowed to expire. We anticipate
significant anxiety surrounding this
issue, but believe that the fiscal drag
will ultimately amount to 1% to 2% of
GDP. We are positioned defensively,
but intend to take advantage of any
market weakness over the next few
quarters to increase our exposure to
economically sensitive companies
that exhibit solid profitability and
good prospects for long-term dividend
growth.
The tone of recent U.S. economic data
has been much better, as employment,
housing and consumer spending are
all showing signs of improvement. In
terms of the job market, unemployment
claims remain in a downtrend and
surveys indicate that companies are
planning to boost hiring. In the housing
market, the improvement is even more
broad-based and impressive, as the
number of homes for sale has returned
to pre-crisis levels and the median
asking price is rising thanks to record
affordability. Rents are increasing
at a 10% clip in many regions and,
combined with record-low mortgage
rates and the drop in home prices,
investors and first-time homeowners
have stepped back into the market.
Given that the employment and
housing markets are healing, the U.S.
consumer is again starting to contribute
to economic growth. Consumer
confidence is at cycle highs, credit is
expanding and household formation is
finally on the upswing after 6 ½ years
of a flat or declining trend. While the
improvement in household formation is
not great, the trend appears to be selfsustaining
enough to have encouraged
1 million people to get out of their
parents’ basement and into their own
place. It’s about time!
Despite the gyrations in the
macroeconomy, corporate
fundamentals remain in good shape.
Stocks are attractive in valuation terms.
They trade at a roughly 5% trailing freecash-flow
yield and 12 times this year’s
estimated earnings. Interestingly, more
than 50% of the stocks in the S&P 500
index sport dividend yields greater
than the yield on the 10-year Treasury
bond. The only other time that this
happened was in March 2009 - near
the market low. While this seems worth
exploiting, the real attraction of the
stock market lies in the fact that the
payout ratio is at an all-time low, while
cash levels and profitability are at alltime
highs. The potential for companies
to raise dividends meaningfully over
time is extraordinary.
While the focus of the media and
most investors is on near-term
political events in Europe, there
are many exciting long-term
developments occurring in the U.S.
The energy industry is undergoing a
supply revolution, as it harnesses
new technologies that will lay the
groundwork for growing surpluses
in crude oil, natural-gas liquids
and natural gas. This has profound
implications for employment,
economic growth, the trade deficit,
the U.S. dollar and energy security.
In particular, U.S. manufacturing
is enjoying a renaissance due to
this new energy-cost advantage,
relatively high productivity growth and
subdued labour-cost growth. In China,
manufacturing wages have been rising
at a 20%-plus rate over the past several
years. Add in China’s strengthening
currency and higher shipping costs,
and it is no longer a clear-cut decision
to move manufacturing across the
Pacific Ocean. In fact, dozens of
companies have announced plans to
bring capacity back to the U.S. A road
to a more energy-secure U.S. will take
years to play out and policymakers
could always derail the momentum, but
the potential is huge and needs to be
part of investors’ analytical framework.
SAMPLE
The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 55