Things are looking up for the US economy. But how can investors capitalise? Emma Wall reports from New York.
Walking down Fifth Avenue in New York City, it is easy to believe that the American economy is booming. Consumers pour from shop entrances, jostling bags hanging from each arm.
Consumers are in the mood to spend, and this confidence is not just political.
What has boosted their household incomes? For a start, the US family has received an effective tax cut in the form of cheaper fuel. Thanks to new shale gas and oil discoveries in the US, it is predicted that America will be the world's largest energy producer by 2020.
The US energy department said the country would produce 11.4 million barrels a day of oil, biofuels and liquid hydrocarbons next year, almost as much as Saudi Arabia.
And by 2030 it will even be a net exporter of oil. This has led some commentators to claim the country is enjoying its second "Black Gold" boom, almost two centuries after the first.
And the impact is not restricted to the energy sector. A study by the American Chemistry Council said the shale gas bonanza had reversed the fortunes of the chemical, plastics, aluminium, iron and steel, rubber, coated metals and glass industries.
The re-election of President Barack Obama has provided a boost to corporate as well as consumer confidence.
"There is more political certainty following Obama's re-election, giving companies more clarity on which of their projects should be profitable. This means they could start investing and hiring at a faster pace," said James Butterfill, an equity strategist at Coutts.
Immigration and a healthy birth rate mean that the population growth is faster than in any other developed country. Job creation is slow, but unemployment is declining.
Many of the new jobs are in the manufacturing sector 500,000 jobs have been created since the recession. Where previously manufacturers would outsource production, pouring profits into overseas development, they are now bringing it home.
"High oil prices have reshaped transportation costs for US manufacturing companies," said Joanna Shatney, US equities manager for Schroders. "This, coupled with wage inflation in emerging markets, a weak US dollar and complex supply chain, has meant that production is starting to move back to the US. Low natural gas prices also mean that industries that use gas in production are able to price more competitively."
Ford (NYSE: F - news) and Caterpillar (NYSE: CAT - news) , for example, have both begun to "re-shore" plants and facilities after salary, energy and property inflation eroded China's competitive advantage.
There is the risk that the oil discoveries will push down the price of the commodity, and if the price fell to less than $50 a barrel it would no longer be a viable investment story. But with this week's price of $108.8, that is a while off.
Another industry seeing improvements is the housing market.
"The housing market is now clearly recovering, with prices, sales and activity significantly increasing. This should boost consumer confidence as their net wealth increases, as should signs of improvement in the labour market," said Mr Butterfill. "It might also open up opportunities for investors, although existing closed-ended funds may have already priced in some of the recovery and will be on a premium to net asset value as a result. Newer funds coming to market may offer better value."
At the moment housing shares are doing very well although the mortgage market has not picked up at the same pace.
"But with the job market picking up, the unemployed in their twenties and thirties currently living with their parents will in time get jobs and move out," said Ms Shatney.
However, she admitted that there would be entire regions in the US that will never recover from the global recession.
"Companies go where it is cheapest to produce their products. Due to the geographical movement in the manufacturing industry, there will be some regions that fall by the wayside," she said.
Global stock markets, which initially greeted the re-election of Barack Obama by creeping higher, fell shortly afterwards. Analysts said that now the election was decided, the US was staring starkly at the impending "fiscal cliff" and the prospects were not positive.
The fiscal cliff is the scheduled reversal on January 1 of a series of tax cuts. The estimated impact of these tax holidays ending is a total of $620bn.
But many analysts do not believe that the government will allow the fiscal cliff to happen.
"The danger on the horizon is the fiscal cliff with control of Congress remaining split following the elections," said Mr Butterfill. "We remain hopeful that the cliff will be avoided. Although polarisation makes it less likely that full agreement can be reached to extend the tax cuts and spending programmes, we expect at least some of the measures to be deferred. This would prevent its economy from slipping back into a recession."
Fred Schaefer, a US equities specialist at Schroders, said the cliff might be avoided by some political bartering.
"The Republicans may consider raising [tax] rates in exchange for a tax-code reform," he said. "And the Democrats may be willing to allow means testing for certain benefits."
His colleague Ms Shatney reiterated the point. "The US is in a significantly stronger position than it was a year ago. US government spending will be a drag on growth for the next few years but we think it is manageable."
Because of the uncertainty, Rob Crawshaw, senior fund analyst at Brewin Dolphin, recommended US funds with a bottom-up, stock-picking approach. He said investors should seek to balance growth and value funds in order to provide the best opportunity to outperform irrespective of the broader market conditions or impending economic reform.
With this in mind he recommended Brown Advisory US Equity Growth and JPM US Equity Income, which over the past three years have returned 48.1pc and 42.3pc respectively, compared with 39.1pc by the S & P 500.
The US is not cheap compared with other developed equities in the eurozone, but experts argue that the risk versus reward trade-off remains attractive. Where Britain and the eurozone are still in the process of "deleveraging" banks, the US has already recapitalised. The same can be said of corporates.
"The US story looks very compelling as we are seeing some material structural changes coming through. While valuations aren't expensive, the US market is not the cheapest developed market by any means," said Darius McDermott of Chelsea Financial Services. "That said, any investors who do take this opportunity to invest in the world's largest economy could be rewarded over the long term, even more so if the dollar appreciates."
He tipped Axa Framlington American Growth, Jupiter North American Income, Legg Mason US Equity Income and Threadneedle American Select.