Earlier this year, we provided an outlook for global equity markets. For the world’s largest and most important economy – the United States – we forecast that its economy would continue its steady progression of economic growth, despite the highly publicized dysfunction of the federal political scene. This scenario is unfolding as expected and is rewarding shareholders of well managed companies in that market.
With this in mind, we have been decreasing our exposure to Canadian equities over the past two years, offsetting it with an increased exposure to the U.S. This strategy has paid off. The U.S. equity markets have performed strongly over the past year, while the resource-laden Canadian market has lagged. Our Canadian equities have performed much better than the overall market, as most of our Canadian companies have attributes similar to their U.S. counterparts.
The U.S. economy has continued to grow steadily over the past year, adding between 150,000 and 200,000 jobs per month. While much of the early evidence remains anecdotal, some manufacturing activity is already being repatriated from Asia, as labour and transportation costs in that part of the world continue to rise. While recently released data points to slowing of job growth in the first quarter of 2013, we believe this is temporary in nature. Weather and inventory destocking have contributed to this slowdown and companies are becoming more conservative in their hiring practices, as sequestration and the Cyprus banking crisis have created short-term uncertainties.
U.S. companies are now spending more on research and development (R&D) than ever, driving continued innovation and greater productivity. In fact, the U.S. share of worldwide R&D spending is currently 31%, dwarfing any other country. The United States continues to lead the world in terms of the quality of its research intensive universities and respect for intellectual property rights. Overall, R&D spending in the U.S. has grown 25% over the past decade, faster than in any other part of the world.
In an earlier letter, we featured one example of how technological innovation was driving revolutionary change in the North American energy industry. With the continent rapidly heading toward energy self-sufficiency, we stated that this would be a geo-political game-changer. We may have understated the case. The rapid advance of production, coupled with dramatically falling prices (mostly for natural gas) is leading to the re-industrialization of the US industrial, refining and chemical complexes, particularly on the Gulf Coast. This is not a trivial development. The American Chemistry Council now estimates that low priced natural gas will generate over $70 billion in new capital investments over eight different industries that use gas as a feedstock.
The evolving industrial renaissance of America will also require renewed infrastructure. Much of the country, particularly the older East Coast, requires renewal. While the Federal government is strapped from a debt perspective, many individual states are not. In much of the country, public-private-partnerships (PPP’s) are evolving at the State level, leading to renewal of roads, urban infrastructure and ports. This will be required to further drive the industrial renaissance, as no modern economy can function and grow without up-to-date infrastructure.
Most of our companies are benefitting from this economic renewal. In addition, most of our U.S. holdings are genuine multinationals that are also profiting from opportunities in the developing world. While equity markets will continue to be volatile, as short-term traders react to each piece of new economic news, we continue to believe the global economic recovery remains in place. Slow, steady growth will be positive for equity markets in general, and our companies in particular, over the longer run.