It has been fashionable to look toward emerging markets for greater returns as the West battles low growth and poor returns.

But experts are warning investors to not be too quick to dismiss the powerhouse that is the United States.

It is no secret that the world still looks to the US as a key barometer for global growth, whether it is the Presidential election results or the general state of its economy.

And despite a difficult period for the superpower, the US economy is in fact doing far better than the UK, the euro area and Japan. The latest International Monetary Fund (IMF) Global outlook report points to some ‘bright spots’ in its recovery.

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American banks are now well capitalised and fast becoming profitable again while corporate balance sheets are strong. Bank lending conditions have also been easing slowly.

The unemployment rate is slowly falling but as wage growth is still moderate, inflation is being kept firmly in check.

Household finances are beginning to improve and the housing market continues to show signs of recovery.

The US is also in a good position when it comes to trade – as exports comprise only 13% of its GDP.

All of this puts the country in a much better position than the likes of China, Japan and Germany should the world economy suffer another slump in demand.

As a result, the IMF predicts that GDP growth will pick up toward the end of 2013 and accelerate from about 2% in 2013 to 3% in 2014. Not bad odds when you consider the state of affairs across the pond in Europe.

Marshall Gittler, head of global FX strategy at IronFX says: “The US is likely to remain the world’s key economy for the foreseeable future. Despite all the talk about the rise of emerging markets and the coming dominance of China, we do not see any challenges to the US’s position as the number one global economy.

“It remains the most flexible and dynamic economy with a high level of entrepreneurship and innovation. Reflecting this fact, the IMF’s long-run forecasts for growth in the US are higher than those for any other G7 economy and the largest five euro-area economies.”

Emerging markets v US

For many investors the key benefit of emerging markets is the strong growth. The IMF forecasts emerging market countries will grow at a rate two and a half times faster than the G7 countries in the future.

However, Gittler says higher growth does not always mean bigger profits or outperforming stocks.

“A casual glance at the Chinese stock market will prove this point: China’s growth rate decelerated from 1995 to 1999, but stock prices rose almost 300% over that period. Growth then accelerated from 2001 to 2006, but stock prices fell 50% nonetheless.

 

“Secondly, buying US stocks is often a better way to access emerging economies than buying local companies: you get financial reporting of international standards and high-quality management together with substantial exposure to EM countries.

“About 45% of US exports go to emerging countries, largely on account of its close connections with Latin America and 55% to developed economies.
This compares with a much less favourable 25%/75% split in the eurozone. This may also be one major reason why the IMF forecasts stronger growth in the US than in Europe.”

Risks

One notable risk to US recovery is, like the rest of the world, the frequent shocks coming from the euro debt crisis.

But Gary Reynolds, chief investment officer at Courtiers Wealth Management, remains bullish on the US front.

He says: “If I were given £100,000 and told to put it into a single market for the next 10 years, assuming I was not allowed to change the investment in that period, then I would choose the S&P 500 index.

“Our general view is never to bet against the demise of the US economy – it is the world leader and will most likely remain so for the next 100 years.

“It’s difficult to be stock specific and arguably unnecessary as ‘a rising tide lifts all boats’. I reckon asset allocation/market selection is currently more important so I would direct those keen to increase their US exposure to buying the iShares S&P 500 tracker, or the equivalent Vanguard product which, I believe, charges just 0.09% p.a.”

Reynolds says that for investors wishing to be more aggressive, buying US banks may prove effective.

Wells Fargo and J P Morgan are the two biggest banks in the US, both are strong and have sound fundamentals. Reynolds says that the only downside to banks is that their share prices tend to be more volatile, however that may not be the case in the long term.

One high profile stock to avoid, according to Reynolds, is Apple.

He says: “It’s only going one way relative to its competitors and that is backwards. Without a powerful personality like Jobs at its core, excuse the pun, it will become corporate.

“Somewhere out there the next Apple already exists, and the low cost clones are sensational.”