America: Life, liberty and the pursuit of an investment return
The US can't declare independence from the eurozone crisis, but in an election year its prospects for investors look better
Sunday 01 July 2012
There are more reasons than one to celebrate the land of opportunity at the moment, aside from Independence Day on Wednesday. In the past few years, American companies have been the top performers in the world, beating not only the UK and Europe, but also Asia and the emerging markets.
As the eurozone crisis muddles on and the UK goes back into recession, the US appears to be a place to take refuge and potentially grow your money. With elections – which have often provided a boost for the US market – coming up in the autumn it's worth considering whether now is the time to invest for the future and where to find the best opportunities.
"The US looks very attractive relative to other economies," says Rob Burdett at Thames River Capital. "It's one of the most flexible economies in the world, and is one of the few places to have a growing population.
"The housing market is also positive for the first time since the credit crunch – affordability of housing is the best it's been since the late 1960s."
In stark contrast, Europe is like an ostrich with its head in the sand, hoping its debt and growth problems will go away. Tom Becket at PSigma says: "We prefer the US to European equities, because in the US they have admitted they've had problems. They've addressed them, they've taken the pain, and now they can move on. So the US has benefited on the economic growth front."
Aside from these fundamental points, the autumn elections could boost the country's stock market. In the 21 election years since 1928, excluding this year, the S&P500 has delivered positive results in all but four years. The market was up as much as 23 per cent in 1996 when Bill Clinton won against Bob Dole, and 32 per cent in 1980 when Ronald Reagan beat Jimmy Carter.
But it would be wrong to suggest the outlook is entirely rosy for the US. Election years do not necessarily herald a rising stock market or a booming economy, as 2008 showed when the S&P500 was down 37 per cent amid the global financial crisis.
And despite all the positives, some experts say the good news is already factored into prices, meaning there isn't that much room for growth. Robin McDonald at Cazenove reiterated the age-old notion of buying low and selling high.
"European equity markets, like Spain, Italy, and France, are all within spitting distance of lows, whereas the US market is within spitting distance of all-time highs," he says. Although he is not necessarily suggesting you should rush to buy Europe, Mr McDonald says over the longer term, Europe will do significantly better than the US.
If the crisis in Europe deepens, investors could head to the US in search of some form of relative shelter – but it's unrealistic to think the US will be completely untouched by the crisis in the eurozone. "If you think the US will emerge unscathed from that, you are deluding yourself to a large degree," says Peter Fitzgerald at Aviva Investors.
"But the US does have a very accommodating central bank, doing everything it can to boost the economy, which is a significant advantage over Europe."
There is some concern that US politicians will clash over the country's mounting debt pile this autumn, when the debt ceiling is likely to be reached. Political deadlock over debt levels last summer saw the country's top credit rating removed by Standard & Poor's for the first time in its history.
"This triggered a fall in share prices last summer, because the politicians didn't agree," says Mr Burdett. "Given the chaos of last year, you have to hope politicians will rein in the brinkmanship – but it's uncertain."
A raft of tax rises are also set to come in at the start of next year as the Bush-era tax cuts expire. At the same time massive military budget cuts are on the cards, which will cost jobs and could wipe out a chunk of the country's economic growth.
Despite these large stumbling blocks, many are positive about the road ahead for the US.
Darius McDermott at Chelsea Financial Services says that, although the US market is not exactly cheap at the moment, especially compared with other developed markets, it is worth having some of your portfolio invested in the country. He adds that any rise in the dollar will be a bonus for UK investors.
Buying a collective investment fund is one way to access the US market, with stocks selected by a manager at the helm.
Mr McDermott says: "My favourite funds are the Neptune US Opportunities and AXA Framlington American Growth. For an income play, investors could try the Jupiter North American Income or Legg Mason US Income fund."
Mr Fitzgerald at Aviva tips the UBS US Growth fund, which has delivered solid returns of about 66 per cent over the past three years. Other top performers over the past few years include the Baillie Gifford American fund, which has returned more than 70 per cent in this period, and the JP Morgan US Equity Income fund which has delivered about 68 per cent.
But it's tough to find US equity managers who can, after the cost of fees, generate consistent returns. Philippa Gee at Philippa Gee Wealth Management says: "Just as with any sector, you have a mixture of managers who have the capability to add value and others who don't. In the US you could argue it is harder to achieve as there are so many more stocks to choose from and so the potential for the wrong move is much greater."
Ms Gee recommends that before making any investment decisions you should check the pedigree of the fund manager and how they have performed over the longer term and in different markets. "Also, it is worth waiting for a market correction to get in at a decent time," she adds.
On the other hand, if you are looking for a low-cost way to buy the US market, index-tracker funds such as the BlackRock US Equity Index tracker, or exchange-traded funds like the iShares S&P500, are an efficient option worth considering.
Emma Dunkley is a reporter at Citywire.co.uk
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