Saturday, January 23, 2010

January 21, 2010 Investment Perspectives — US and the Americas

Indicative of the sustainable economic recovery, the Morgan Stanley Business Conditions Index (MSBCI) prolonged its rousing finish to 2009 and kicked off the new year on a decisively positive note. On a seasonally adjusted basis, the headline index increased 11 percentage points from 71% to 82% in early January – the sixth consecutive reading in expansionary territory. In unadjusted terms, the headline index rose 12 percentage points from 64% to 76%, and the manufacturing and services subindices were measured at 74% and 77%, respectively.

In our outlook piece for 2010, we reiterated the three major economic themes that we believe will define the upcoming year (see: “Outlook 2010: Higher Rates, Fed Exit and Sustainable
Growth,” January 4, 2010). One of these propositions is our expectation that improving financial conditions, strong growth abroad and diminishing economic excesses would promote lasting recovery through 2011. As we outline below, the January MSBCI certainly provided numerous reasons to believe that this process is already well underway. By every metric, this month’s canvass revealed the strength and durability of the current upturn. Most notably, after months
of dawdling near the critical 50% threshold, the price index expanded unequivocally in January – climbing six percentage points from 51% to 57%. With both consumer and producer prices relatively contained at the moment, we interpreted these results as a sign that the firms under our analysts’ coverage had finally regained pricing power. From an industry standpoint, at least half of respondents from the consumer staples, energy, healthcare, industrials, materials and utilities spaces indicated that their companies had raised prices over the previous year. Moreover, despite declining five percentage points, the credit conditions index still came in at 67% this month. In fact, not a single analyst reported that his or her companies had experienced more difficulties in obtaining financing over the past three months. In addition, after declining four percentage points to 13% in November and remaining unchanged in December, the hiring series recovered these losses in January, with 17% of survey respondents stating that the companies under their coverage had increased hiring over the past three months. According to the January canvass, firms from the consumer discretionary, healthcare, industrials, information technology and materials sectors recently expanded payrolls. Furthermore, for the third straight month, our analysts reported that uncertainty over healthcare reform was not making their companies reluctant to hire – with a mere 7% of respondents claiming that the proposed legislation was having an effect on firms under their coverage.

More importantly, each of the MSBCI’s forward-looking indicators exhibited marked improvement this month and augured robust growth ahead. On the heels of an impressive 18-point increase in December, the advance bookings index surged

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