U.S. equities hold promise: Laurentian Bank

The U.S. economy is strengthening and will set the tone for the global investment landscape in 2011, according to the chief economist of Laurentian Bank.

“Two significant events occurred at the end of 2010 that generated significant momentum for the American economy,” says Carlos Leitao, pointing to the second wave of quantitative easing and the extension of the Bush era tax cuts. “These two interventions will serve to accelerate economic growth.”

QE2 saw the Federal Reserve pour hundreds of billions of dollars into the U.S. economy, while the tax cuts left billions more in the hands of consumers and investors. On the downside, both measures contributed to an immense budget shortfall of $1.5 trillion. The long-term impact of that additional debt is incalculable, as there appears to be no plan in place to repay it.

Still, what’s bad for Uncle Sam isn’t necessarily bad for investors, and Leitao expects the U.S. economy will grow by 3 to 3.5%.

“The stock market, which posted a strong finish in 2010, should be a major beneficiary of these measures in 2011,” he says. “In the wake of the sluggishness that prevailed during the months of July and August due primarily to the concern over sovereign debts in Europe, the tone has changed over the past few months and confidence has begun to reappear. As such, we anticipate that the economic environment in 2011 will be quite favourable for investment.”

Leitao expects equities will be the asset class of choice, as bonds are beginning to decline in value after a massive run-up. For Canadian investors, there is an added advantage: the loonie is resting securely above parity, making U.S. investments more affordable than ever.

“Blue chip securities are the most promising, particularly those of companies that offer products and services related to industrial and computer equipment,” Leitao says. “What should be avoided are the consumer staples and discretionary consumption sectors. The priority should be to consider companies that are leaders in their markets and that pay dividends.”