Euro crisis is free QE for US, says Omam's Johnson

14 June 2012 | By Gary Jackson

Johnson, manager of the £473.1m Old Mutual Corporate Bond fund, says the common fear that contagion from the eurozone will “somehow infect the US” is misplaced and suggests the crisis could actually be helping the world’s largest economy.

“It’s been established that you can have a Greek default and it didn’t cause the whole of the US banking system to fall over,” she notes.

The manager points out that Europe is a relatively small trading partner of the US. Figures from the US Consensus Bureau show all 27 members of the European Union (EU) accounted for just 17.3% of the US’ total trade in goods during 2011.

“The European crisis has underpinned the US recovery. It has given them a massive boost”

In contrast Canada alone – the US’ largest individual trading partner – contributed 16.2% of trade in goods, in total terms, while China contributed 13.6%. Germany, the largest EU contributor, accounted for just 4.1%, less than Mexico or Japan.

“The European crisis has underpinned the US recovery. It has given them a massive boost,” Johnson argues.

“If you think how far long-dated treasury yields have fallen in the last few weeks as people have panicked out of Europe and into a safe haven, it’s like they’ve had this massive extra boost of QE for free.”

Johnson points out that falling treasury yields are beginning to filter through into the real economy. Mortgage refinancing  rates have started to drop below 4%, while there has been an up-tick in the selling price of pre-existing homes. (article continues below)

“You’re now getting a whole swathe of people that might be moving out of negative equity and are about refinance at extremely cheap levels,” she continues.

“That’s the one thing that’s just about to start to get some traction in the US economy - the pull down on the treasury curve, you have a wave of mortgage refinancing, you’ve got more money in consumers’ pockets and they go out and spend in the real economy.”

Johnson also notes that there has been “a lot of noise” about the health of the US economy in recent weeks, especially as payroll numbers have shown signs of weakness and uncertainty persists in the run-up to the presidential election in China.

Despite this, the manager still likes the US growth story and the country’s businesses: “It looks like it’s going to stumble along at 2% - not the whooping 3.5% people were hoping for earlier this year - but those stories are still in tact.

“Corporates are in an economy that’s still growing and companies there are in good shape after the restructuring that took place in 2008.”

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