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US economy strength not matched by equities

US economy stock market

The US economy is expected to strengthen, but this will not mean the US stock market will outperform other international markets.

A senior economist has forecast a strengthening of the United States economy in the year ahead, but does not expect this phenomenon to translate into the best offshore investment opportunities for individuals.

AMP Capital multi-asset group senior economist Diana Mousina has predicted a large injection of fiscal stimulus will result in the US economy recovering strongly in 2021.

The rebound is expected to be of significant enough magnitude to enable US gross domestic product (GDP) to have recovered its 2020 coronavirus-triggered losses by the end of the March quarter, with GDP anticipated to return to its pre-COVID-19 trend level by the end of the year, Mousina noted.

According to Mousina, there are some unwanted downsides to this recovery, such as inflation, that will hamper any corresponding pick-up in investment markets.

“Fiscal stimulus could overheat the economy in late 2021 or early 2022. Consumer inflation expectations are already at multi-year highs,” she noted.

A further negative for the equity market she identified is the fact business investment growth is still lagging behind the performance of the economy.

As such, she concluded this is likely to be a moment in time when the US share market will not move in lockstep with the US economy.

She pointed out this does not mean US stocks will not generate positive returns, but rather will not match the investment opportunities available through other overseas exchanges.

“US equities performed exceptionally in 2020, with the S&P ending the year almost 16 per cent higher. Solid earnings growth, fiscal stimulus and low interest rates are positive for the US share market in the next six to 12 months,” she said.

“But relative outperformance is likely to be in non-US share markets in 2021 from the rebound in global growth, a lower US dollar, relative underperformance in these markets in 2020, compared to the US, and a larger index tilt towards non-technology sectors, such as financials, energy and materials, that underperformed in the COVID pandemic in 2020 and do better in an environment of higher inflation.”

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