US exceptionalism is a phrased used to explain why the US is different from other economies. The dynamism, reflected in growth rates, innovation, trend setting, music, cinema etc sets the US apart.
One key difference is the attitude to investment – and here I will contrast with the UK. In the US, over 60% of adults own shares; in the UK it is much lower. Pension funds distort the picture but, in essence, US household wealth is distributed between housing assets and equities whilst in the UK it is housing that is important.
Attending a recent presentation, the spectacular growth of the US equity market over the last 10 years, supported by a strong housing market, was presented as a key reason the US consumer has been so resilient. And this makes sense. If your assets are rising by 10-15% per annum, and interest rates are low, you can spend a higher percentage of your income and still feel relaxed about financial circumstances. The transparency of dealing accounts lets people assess their net worth and make spending decisions accordingly. So far, so good.
The flip side is that the US savings rate has dipped below 3% and is approaching levels seen in the years prior to the Great Financial Crisis. This is in contrast to the UK where savings rates have recently been pushing higher. This makes the US consumer highly dependent upon the continuation of the bull market in shares and housing. With interest rates on the way down, there may not be much to worry about – both asset classes typically benefitting from lower rates. But the present picture becomes problematic if earnings growth stagnates, interest rates fail to come down as expected or investors decide that present valuations over discount future cashflows. Markets can quickly move from virtuous to vicious cycles. If there is a hint that US exceptionalism is built on less solid foundations we could be in for a rocky ride.
“Markets can quickly move from virtuous to vicious cycles.”
On the market front, UK government bonds were weak, in contrast to the stability seen in US yields. There is increasing nervous about the October budget and the tax and spend priorities of the government. Whilst the Chancellor has been keen to emphasise stability and fiscal prudence, investors are nervous. The lessons of October 2022 will not be lost on the Chancellor, and a repeat of the dramatic LDI crisis remains unlikely, but the underperformance of gilts is a worrying sign that a more ‘slow burn’ event is happening. Moving the goal posts on fiscal limits will create more headroom for spending. If markets are convinced that such spending is better off in the hands of government than the private sector and that UK productivity, especially in the public sector, can be enhanced, then there is scope for a re-rating of UK bonds. Conversely, if the government spends and taxes more but fails to convince on growth, the outlook is less attractive. The budget on October 30 is looking like a pivotal event.
Monday 30 September marks a momentous event in the UK’s energy transition. After nearly 150 years of coal-fired electricity production, the last coal power plant is closing. The impact of UK energy policies can be seen in the high percentage of electricity now generated by renewable energy. But there is a sting in the tail. UK industrial electricity costs are amongst the highest in the world, putting businesses at a competitive disadvantage. With prices being set by natural gas costs, the benefits of the transition are not being felt by users. A lot of focus has been on consumer energy costs – but not much on the impact on industry. The UK is getting cleaner at a faster rate than most, but handicapping domestic businesses is a poor long run outcome.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.