Could the stocks of U.S. exporters be the next asset class to invest in — as the typically delayed impact of falling real exchange rates is felt? The U.S. dollar has depreciated approximately 25% in real terms (exchange rates adjusted for inflation) since early 2002. That would seem to be a significant improvement in competitive position. Yet, the trade deficit hasnt fallen much and remains near 5% of GDP.
But wait for it. When the dollar fell 30% in real terms from 1985 and 1991, the trade balance went from a deficit equal to 3.5% of GDP to approximately balance. This time around oil prices have climbed and masked some of the reduction. And most of the dollar depreciation since 2002 has come in the second half of the period (converse of earlier devaluation) — so much of the effect is still to be felt (given long lags of up to two years in the impact of exchange rate changes).
Extrapolating from the 1985 to 1991 experience, John Lipsky, First Deputy Managing Director of the International Monetary Fund(IMF), expects the U.S. trade deficit will decline in coming years to under 3% of GDP. For investors, this means a promising asset class going forward could be U.S exporters. As Lipsky said: If the decline in the value of the dollar is supporting a narrowing of the U.S. current account deficit, it is thereby helping to promote an inevitable shift in the sources of growth between tradable and non-tradable sectors in both surplus and deficit economies.