NEW YORK Europe may be a cheap investment location for savvy equities investors, but the improving outlook in the United States is making the worlds biggest economy a lot more attractive to commodities companies.
Industry executives and economists said that while European stocks are seeing fund inflows reach multi-decade highs, the United States is experiencing a revival on the productivity side, particularly after the U.S. Federal Reserve signaled the era of cheap money was coming to an end.
"Europe has lost due to low growth and a weak economic activity level, especially in southern Europe, although indicators for Europe have improved lately. Generally, productivity in the U.S. has been better than in Europe, which also makes the U.S. more attractive than Europe," Luvata UK Ltd. chief financial officer Jyrki Vesaluoma said.
According to Vesaluoma, general business demand risk in the United States has fallen due in part to a far more stable outlook over the past 12 months.
"It is assumed that the U.S. dollar will strengthen further against the euro (...) which may change the competitive position of many U.S.-based companies and business decisions if the stronger U.S. dollar level remains," he said.
Dollar-denominated costs are also higher, including energy, raw materials and labor, which has led to aggressive cost-cutting measures from producers and consumers alike.
Similarly, the inverse correlation of the U.S. currency to metals prices means the stronger dollar is weighing on prices for key commodities such as copper and aluminum.
However, what the U.S. economic recovery adds to metals demand it may take away from emerging markets demand, at least in the near term, Goldman Sachs Group Inc. analyst Max Layton said.
The Fed has a dual growth and inflation target, something that makes its monetary policy more volatile and reactive than pure inflation-targeting countries.
Expectations of tighter Fed policy in the form of a tapering of asset purchases has led to the exodus of capital from emerging markets, a process that has seen the currencies of countries such as India, Brazil and Indonesia depreciate significantly.
"The underlying issue remains macroeconomics and the question of whether capital will continue to flow to emerging markets as their economic prospects become somewhat less positive," KCG Europe Ltd. managing director Ioan Smith said.
There are two positive factors that lower the probability of a serious crisis, Smith said: increased regulation and a reduced inclination by emerging markets to use foreign exchange reserves to defend a particular exchange rate.
"To the extent that these countries can allow their currencies to depreciate modestly as capital flows out, they will naturally tend to increase their exports and reduce their imports, thus tending to reduce their current account deficits and lower their future funding needs," he said.
At the same time, lower costs than Europe and the United States mean the region will remain attractive to global companies.