The investment climate is being shaped by four forces:
1. De-synchronized business cycle with the U.S. ahead of the pack
2. The prospects of sovereign bond purchases by the ECB, amid political uncertainty sparked by Geece's snap election
3. The continued drop in energy prices is a stimuluative writ large but poses challenges for oil producers and the leveraged eco-system that has been built on the premise of high oil prices forever.
4. Rather than a race to the bottom, as many saw it previously, several emerging market countries are resisting further depreciation of their currencies.
1. De-synchronized business cycle: This is the meaning of divergence. The US policy response to the financial crisis, and the flexibility of the US institutions bolsters the world's largest economy. The US economy expanded more in Q3 (5% annualized) than the euro zone (less than 1%) and Japan (less than 0.5%) in 2014 put together. China, the world's second largest economy, is slowing.
While the eurozone, Japan, and China provide more stimulus for their economies, the US is expected to lift rates around the middle of the year. This anticipation underpins the US dollar. Given the importance of exchange rates (fx variability can be 2/3 of the return on international fixed income portfolios and 1/3 of the return of international equity portfolios), the prospects of a stronger dollar also makes US assets more attractive for non-dollar-based investors. Interest rate differentials also are moving in the US direction.
Even though the above trend growth in the US is not sustainable, employment and consumption can still expand. The US reports the December jobs data at the end of the week and another 200k+ report is expected. Although it does not match November 331k increase, it is still healthy, and the internals are also improving.
Auto sales will be interesting. The decline in the price of gasoline, easy and low financing, and the improving labor market underpin a strong year of sales. Manufacturer incentives also help. Industry figures suggest there was an average $2,894 in incentives or discounts during the month. This is almost a 6% increase from a year ago. The consensus expects a 16.9 mln unit pace down slightly from the 17.03 mln pace in November. It would put the entire year sales around 16.4 mln, the strongest in a decade. This compares with 15.5 mln vehicle sales in 2013 and 14.4 mln in 2012.
Strong sales are behind the strong production figures. The industry is integrated on a continental basis. Output in North America is projected to have risen by 7% in 2014 to a little more than 17.2 mln vehicles. To put this in perspective, consider that the peak was in 2000 at 17.3 mln vehicles.
