Lessons Learned from the FPA Conference in the USA

 

I recently spent three weeks in America, where I attended the Financial Planning Association (FPA) Conference in Orlando, Florida. Speaker after speaker said that as financial advisers, we need to block out the noise of the press and the perceptions it engenders, and realise that this is a great time for us to invest in off-shore shares.

 

It did not matter if the speaker was an economist, a behavioural scientist or a social commentator, They all repeated the mantra that things are starting to turn in the US and even with the immense problems it faces, the stock market is going to do well. Why such cautious optimism, in the face of so much doom and gloom?

 

There is no doubt that the mood of the country is reluctantly turning. It feels as if Americans have been pushing a heavy stone up a hill and that the time to get to the summit is very near. Of course as we know from life experiences, you often give up or relax just before you get to the top, which can be perilous.

 

The reason for this lack of total confidence does not stem from government shutdowns or rising debt ceilings. It stems from the fact that the rich have been getting richer and the middle class has been getting significantly poorer ever since 1970. But there is now room for cautious optimism and even though there are significant dangers lurking, there seems to be a strong case for global equities. What are some of the indicators?

 

  • Property prices have increased 12,8% year–on-year in the top 20 cities across the US. People who bought in 2005-2006 are still underwater, but property price increases are making many people feel better.
  • Most cities are better places to live than they were 20 years ago. Restaurants are packed, car sales are up, the government is selling its stakes in the car companies (at a loss), and finally, some of the big banks globally will be sued by the mortgage companies for fiddling with the Libor rate. These will become some of the biggest libel suits in history.

 

  • Last year, Apple sold 34 million iPhones and 24 million iPads, and its total sales were up to $38 billion dollars, only to be surpassed by Samsung. The only cell phones you see now in America are smart phones and BlackBerrys seem to have disappeared!

 

  • The US is about to become a bigger producer of oil than Saudi, and by 2030, it will become independent of any imports. Energy costs continue to drop. The boom in information technology will produce more economic growth. In the next 10 years, we will see the advent of driverless cars. 3D printers are now available at schools in the US, making it possible for a child to draw a horse, and have it replicated, layer by layer, as a statue. Imagine what can be done with this technology in the manufacturing industry in the years to come!

 

  • Government budgets will improve as spending decreases, and revenues will increase. American education standards are also going up. Amazingly, its standard of education has been steadily declining since 1960, but with a concerted effort over the last few years, this has finally turned.

 

  • The US’s main trading partners, Mexico and Canada, are also doing better and the trading zone will continue to get stronger. The US and the EU are starting a long process of setting up a trading zone that can compete with China in the long-term.

 

Tyler Cowen, a Nobel Prize winning economist who spoke at the conference said that the thing that troubled him the most was the bond market and he felt that once tapering becomes a reality, investors will lose money in this sector. Other points he made were:

 

  • Europe is also starting to improve and will slowly emerge from its problems. Numerous European countries will remain backward and dysfunctional, but many blue chip companies will continue to do well as the economies slowly pick up.
  • Don’t confuse countries with multinational companies
  • China is a worry in the short term, but its long term outlook is very good. Demographics are often a concern, but he pointed out that all the Chinese do is urbanise, moving people from rural to urban areas, to keep costs low and drive the economy, as they enter the middle class.
  •  Government issues in the US will continue to falter until there is someone with a majority in both houses. To quote Churchill:  “When the Americans have exhausted all other alternatives, they will eventually do the right thing. They will come through this impasse and cut spending and raise taxes to bring the deficit down.”

 

Overall, the stock markets are offering value and the bond market is obviously overvalued long term. We need to make sure that we have enough exposure to this recovery in our portfolios.

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