Investors can't get enough of the US

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The Independent Online

It should be the red rag the bulls have been waiting for. Google, the US-based internet search engine company, is talking about floating on the New York stock market next spring, sending a signal to investors round the world that the long bear market may be over and it could be time to add some Yankee flavouring to share portfolios. But fund managers are divided over whether the US outlook is mouth-wateringly Googlicious or liable to leave a nasty taste.

Google management is reported to have met US investment banks in the past few weeks to discuss an initial public offering, or IPO, before having its shares listed on the stock market. Private investors' interest has been sparked by suggestions that Google may make its shares available to the public through an online auction, but this is problematic. It faces formid-able regulatory barriers, including the requirement under US law that a broker selling shares must know the investor can afford the risks.

But commentators on both sides of the Atlantic warn that a Google IPO on its own is no guarantee that the good times will roll. "It is probably a stretch to say a Google IPO would restore or boost confidence," said Mark Warminger, US fund manager & technology analyst with ISIS Asset Management. "Google is a profitable company with a proven business model, with a growth rate that many tech companies would envy through the downturn. This is very different from the IPO market of the late 1990s."

He added that if Google did float, it will be coming to market far later in its corporate life than most of the boom-time IPOs. This makes an investment in the company less speculative, because more is known about its performance. But that same knowledge means the chance of overnight gains after flotation is slimmer too.

And US share prices have already risen sharply, driven by renewed shareholder interest. David Rawlings, the head of commercial development at Hargreaves Lansdown, the Bristol-based shares and investments broker, said: "Shareholders are scrambling to get some of the action. We have had a massive rise in interest for US stocks over the past two months, and especially technology stocks. Twelve months ago the average UK investor wasn't interested in US stocks. Now they can't get enough."

The US Dow Jones Industrial Average index, main yardstick of American share performance, has risen 16.5 per cent over the past year, and the technology-heavy Nasdaq Composite index is up nearly 33 per cent. Hewlett Packard, the computer company, is up almost 43 per cent from November last year, and the mighty IBM is up just short of 17 per cent. The industrial and services giant GE is up a conservative 8.65 per cent, but shares in the world's biggest bank, Citigroup, have risen 31 per cent. Much of the rise has come since the end of the invasion of Iraq, but the end of open warfare there is already factored into most US share prices, as is a more positive outlook for corporate earnings. Legg Mason Investors' US equity fund manager, Mary Chris Gay, believes that the past two quarters "marked the beginning of a new bull market". But she also points out that the strongest growth was early on in that period, with "an explosive move off the lows".

Currency movements have helped boost US companies' earnings this year, says the US equities team at the Scottish insurer, Standard Life, which has cut its weightings in consumer staples and is cautious on the US discretionary consumer spending sector. Overall, Standard Life is confident about the US market, with a heavy weighting in capital industries and technology. And other fund managers think US shares are on an upward curve.

Standard's head of global investment strategy, Andrew Milligan, says economic factors in the US are favourable. Figures on Thursday showed the US economy had been growing at its fastest pace in 20 years.

Gross domestic product expanded at an annualised rate of 7.2 per cent in the three months between the beginning of July and the end of September, well above expectations of 6 per cent. "It is a fairly encouraging number overall," Eric Norland, market economist at CDC-IXIS Securities in Paris, says. "There were concerns that the growth was all down to consumption but business investment also rebounded."

The market's biggest push in 2004 is likely to come from President George Bush as he mounts a campaign to be re-elected next November. The US government has already unveiled tax cuts for businesses and individuals, and there is no sign of a change in the President's weak dollar policy. The Federal Reserve, Mr Milligan says, is still concerned about deflation. This fear should keep interest rates down.

Not all shares or sectors will benefit equally from the positive economic climate. Standard Life has cut its investment weightings in consumer staples and is cautious on the discretionary consumer spending sector. "For a sustained expansion in the US, we want to see a continuing movement away from household spending to business investment," Mr Milligan says. "This is the main driver for better exports."

He favours general industrial, mining and resources, capital goods companies and some consumer stocks. The US housing market is still strong, but "classic defensive" shares such as tobacco or housebuilding are less attractive now, he added.

Just as in the UK, investors also need to pick US shares with care. Although the general climate in the US is positive, bad news such as a profit warning or a disappointing quarter will quickly affect share prices. Mr Milligan says: "When a company does report poor news, it is still punished severely, so the markets do need continued injections of good news."

Investors can find themselves unwittingly exposed to several markets at once. Among the sectors in favour among US-focused funds based in Britain, many rely directly on exports or on selling to US companies that export. Growth in Asia is boosting demand for US industrial and technological output, but Mr Milligan says a recovery in Europe is needed if the US markets are to benefit fully from a cyclical upturn.


* The US is among the most accessible overseas markets for UK investors. Brokers will deal in US shares in sterling, or dollars. For internet investors, commissions for trading US shares can be lower.

*US brokers such as Charles Schwab offer US dollar accounts for UK clients, at $29.95 a time for the first 1,000 trades. E*trade charges $9.95 for online trades.

*The cheapest way to trade US shares is in dollars, but for occasional trades, dealing in sterling is cost-effective: Hargreaves Lansdown adds £5 to its standard 1 per cent commission, minimum £15, or £9.95 online.

*Investors will have to pay tax in the UK on any gains and dividends, whether they deal with a UK broker or a US one. There is a double taxation treaty between the US and the UK so investors should not have to pay tax twice. UK investors can usually apply to the US Internal Revenue Service for dividends to be paid without tax, and there is no stamp duty.

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