INVESTING IN US CORPORATIONS

By Greg Farries, BSC, The Nakamun Group, Calgary

Background on US Economic Picture

Since the 2008 financial crisis, more and more investors have become increasingly concerned about the stability of the US financial and economic systems. From a macro-economic perspective, both have indeed deteriorated over the last decade and investors have been justified in being more concerned as debt levels reached all-time highs, housing prices collapsed, unemployment increased, stock valuations declined, and government debt levels skyrocketed. All this led to concerns that the US currency could be significantly devalued and/or inflation and interest rates could increase considerably.

Government debt levels are near historic highs, when measured as a percentage of gross domestic product (GDP), which is really an indication of the government’s ability to repay debt. The only time the debt level was higher was right after World War II.

The US is reaching a critical stage where the government must develop a plan to deal with its debt. Standard & Poor’s recently downgraded the US long-term debt from its coveted AAA rating to AA+. US politicians appear to be under significant enough pressure that they might finally deal with their country’s financial and economic issues. As Winston Churchill said, “You can always count on the Americans to do the right thing — after they have tried everything else.”

The Turning Tide

There is now evidence that consumer debt levels and unemployment are declining, housing prices are starting to stabilize in most of the country, and the stock market has begun to recover, although stock valuations are still slightly below their historic average.

Significance to Canadian Investors

Canadian investors should, arguably, take another look at investing in the US. The appreciation of our currency and the attractive valuations in the US should create opportunities for long-term investors. A weaker US dollar will help their economy by making exports more attractive.

Remember in the early 1990s, a reverse situation existed. Canada had accumulated a large amount of debt and was running large deficits, which led to our currency being devalued. The currency devaluation made it easier for Canada to get its fiscal house in order.

Even if you are skeptical about the current US recovery, there is no doubt that a global recovery is underway. If you look at the 500 companies that make up the S&P 500 index in the US, approximately 50 percent of their revenues are generated outside the US. Hence, many US corporations may now be worth considering.

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