Investors have more to celebrate in the US than Independence Day
Is America heading for sustained recovery or a double-dip recession?
Saturday 03 July 2010
Americans gearing up for their Fourth of July celebrations tomorrow will do so with a little more hope in their hearts. The country appears to be climbing out of recession faster than many other economies, causing investors to back the US as the next growth opportunity. But with US companies looking stronger than they have for a long time and American stock markets up around a fifth in the last 12 months, have UK investors missed the chance to join in with the firework celebrations and share in the profits?
"It is still a good time to consider investing in the US," says Simon Moore, senior research analyst at advisers Bestinvest. He says the country is coming out of recession more speedily than the UK and the rest of Europe. "This is largely due to US corporations being able to cut costs quickly," Moore says.
It's a point that many fund managers specialising in the US echo. Many big US companies have no qualms about cutting back quickly when things get tight as they have done in the recent recession. And they've been quick to seize investment opportunities as the recession has receded.
"Many US companies are seeing top-line revenue come back, which should lead to an increase in profits," says Moore. "As a result, cash-rich large companies are able to expand into growing emerging markets and acquire small rivals to increase their market share. We are seeing a trend of global brands increasing market share, especially in developing economies where many less-experienced CEOs have not had the vision to expand when times seemed to be tough."
However, he warns it's not all good news. "The picture is not entirely rosy as the outlook for US house prices is still likely to remain gloomy and local domestic consumer spending will remain subdued. Unemployment is also likely to remain high at around 10 per cent for another year or two."
Managers of US funds are also cautious about prospects, despite the relative upturn in recent times. "The US market will likely remain choppy," warns Adrian Brass, manager of Fidelity's America and American Special Situations funds. He says there are worries about the global uncertainty created by the European sovereign crisis, the sustainability of Chinese growth, and concerns over mid-term US growth once government stimulus is removed. While the European economy remains uncertain a negative impact on the US economy could follow.
"The coming months should provide clarity on some of these macro issues, and with valuations very attractive this could eventually be supportive for share prices," says Brass. "Specifically, I believe the market is likely to reward quality growth companies since they will fare well even in a low economic growth environment and, moreover, many currently look cheap having been left behind in the rally over the past year."
Tom Walker, manager of the Martin Currie North American fund, believes the current recovery in the US is quite fragile. "Jobs are being created – but not at the rate we might have hoped for at this stage of the economic cycle. And Europe's recent embrace of fiscal austerity could weigh on global demand for several years," he says.
However he is more positive about prospects beyond the next few months. "If consumer demand continues to recover, business inventories will need to increase significantly just to keep pace with sales. And capital expenditure is starting to rise from a 25-year low. That could represent a powerful driver to US growth in 2011 and beyond."
The fact that the US was the first to experience an economic downturn in the most recent crisis is a positive, according to Simon James of Wiltshire-based investment managers Gore Browne. "The US is now cyclically in the position of improving due to plenty of fiscal stimulus," he says. "Following this period of uncertainty, people will continue to back the dollar and the US has already been very aggressive in sorting out failing banks."
However, he has concerns over the debt across the nation and thinks there is still a long way to go to recovery while banks are being strengthened. "There will be more rolling introductions of financial regulatory reforms to come, which will constrain future credit growth to an extent," says James. "The risk of future property loan write-offs could be very substantial and all these later points mean even though the US is likely to be in an economic upturn in years to come, growth will be slower than in the last couple of decades."
The US could yet be hit by the feared double-dip recession, warns Aled Smith, manager of M&G American fund. "The US corporate sector is recovering well but concerns remain that the sovereign debt problems in the eurozone would spread beyond the euro area." But he also points to the fact that because US firms reacted quickly to repair their financial standing during the recent recession, many US companies are now cash-rich, giving them the flexibility to weather any short-term economic turbulence.
Cormac Weldon, manager of Threadneedle North America Select fund, says positive investor sentiment has helped US stocks to perform comparatively well in recent times. "The US equity market has benefited from the perception of being a relatively safe haven for increasingly risk-averse investors," he says. "This comes as equity markets around the world have faced renewed uncertainty stemming from investor concerns over government deficits, an end to central bank stimulus measures and speculation of a double-dip recession."
Investors tend to view the US as an attractive destination for their money, despite increased uncertainty, because of the depth and breadth of its market, says Weldon. "Its immense scale still sets it apart from any other country.
"Another factor is the advantage of a relatively light regulatory regime, coupled with a transparent, predictable and evenly applied legal framework. US companies have also shown themselves capable of rapidly adjusting cost bases and many companies have restructured their businesses to benefit from globalisation."
Weldon is optimistic about the prospects for US shares. "The average equity today represents much better quality than at any time in the past 20 years while valuations are the most attractive they have been since the early 1990s. Meanwhile, cash flow, debt to equity, and capital allocation are all better than they were then."
David Kuo, of financial website Fool.co.uk, thinks investors should include some US stocks or funds in their portfolio as a matter of course. "There are some things we do better in Britain but we have to be realistic and accept that we have some way to go before the M4 corridor turns into Silicon Valley. Consequently, investors looking for the next Microsoft, the next Apple and the next Amgen should look at markets across the Atlantic," says Kuo.
"Aside from tracking down leading-edge businesses, investors should also try to build a diversified portfolio of shares, which not only means investing shares in different sectors but also shares in different countries, too. Diversification may not be a recipe to maximise investment returns – it's a recipe to help reduce sleepless nights."
So, if you are tempted by the opportunities offered by America, which funds should you go for? "The fund pick for us is Findlay Park, a North American fund," says Simon James. "James Findlay's track record is second to none. He largely invests in SMEs and has consistently over the last 20 years outperformed its peers."
Stuart Clark of multi-manager specialists Fitzwilliam Asset Management recommends three funds: Eaton Vance International US Value fund, Martin Currie North American and the Threadneedle American Select fund. "Each fund has a well-documented, disciplined investment process that has been tried and tested in various market conditions," says Clark.
"Even through the worst of the credit crisis the managers were challenged by proper risk management at the investment house but not forced to change specific investments or their process as a result of the instability in the markets."
Simon Moore says investors should look to the US for diversification. "With this in mind, grey hair is good in these times and investors should look to fund managers who have seen a few market cycles. Generally, large cap offers better value than small cap and we recommend M&G American as a good way to gain exposure."
US financial facts
* The US share index S&P 500 has climbed a fifth – 22 per cent – in the last year. The London share index FTSE 100 is up a similar amount over 12 months.
* The industrials sector was the best performing US fund sector in the 12 months to June 2010, according to Thomson Reuters sector data.
* The US dollar has strengthened against the pound and the euro in the last year. It buys 9 per cent more UK sterling now than it did in June 2009 and 12.5 per cent more euros.
* Industrial production in the United States climbed by 8.1 per cent between May 2009 and May 2010...
...although unemployment rose from 9.4 per cent to 9.7 per cent in the same period.
* New York is the most expensive city for expatriates to live in the US, but it is ranked only the 27th most expensive in the world, according to the latest cost of living survey from Mercer. London is 17th while Luanda, Angola is the most expensive.
Case study: ‘Investments will support my long-term aims’
Training consultant Paul Malone put £8,000 into Fidelity's American fund eight years ago and, despite a less than great return, he is happy to stick with it because he believes that US companies will perform well in the long term.
"It's all part of my retirement planning," Paul, 56, from Cheshire said. "The fund hasn't performed particularly well since I invested, but I'm hoping for an improvement in the next few years as I plan to cut my working week when I reach 60. At that stage I plan to use my investments – not just in the American fund – to supplement my reduced income until my pensions kick in at 65."
The majority of Paul's other investments are in UK funds so he decided that investing in the US would help diversify his portfolio. "I felt that being invested in household names across the pond on a long-term basis would be a reasonable way of spreading the risk," he explains. "I don't really see the US economy as a risk area given the length of time I intend to remain invested."
He says he chose the Fidelity fund because of its highly rated fund managers, and has stayed with it because of the cost of switching. "I haven't moved my money into different funds since I invested as I'm not for switching investments," says Paul. "The simple fact is you could end up losing a lot of money just from the charges involved in continually moving your money between different funds."
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