What does a Bush second term hold for investing in America?

Want more bang for your buck? It's time to take a few risks and invest more Stateside, says Nick Clayton
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The Independent Online

Despite the presence of a United States president who is supposed to be good for business, foreign investors have not done generally well over the past four years. With his re-election comes new debate about whether the US economy is slipping towards recession or whether the bad news is in the past. Perhaps now is the time to start buying into the world's largest economy.

Despite the presence of a United States president who is supposed to be good for business, foreign investors have not done generally well over the past four years. With his re-election comes new debate about whether the US economy is slipping towards recession or whether the bad news is in the past. Perhaps now is the time to start buying into the world's largest economy.

It is true that US investment funds have not performed particularly well recently. "For UK investors, North American funds underperformed all other regions in the past year, while funds invested in the UK achieved double-digit returns. This is mostly explained by the 8.5 per cent depreciation in the US dollar against sterling over that period," says Paul Denley, a senior analyst at leading global mutual fund analysts Lipper.

"Despite this, UK fund managers investing in global portfolios have maintained their asset allocation to the US, where exposure to the UK has fallen by almost 20 per cent and exposure to Europe has risen by over 15 per cent," he says. So it would seem that investment professionals on both sides of the Atlantic have more faith in US than UK stocks at present.

This is partly explained by the currency fluctuations that have affected funds disastrously. If you bought US shares about two years ago your pound would have been worth $1.60, so £10,000 would have bought around $16,000. Say, with shrewd investment, you increased that by 20 per cent you would have $19,200. But with the pound currently worth about $1.85, that $19,200 is worth less than £10,400.

But, while this shows that a fall in the value of the dollar will have a strongly negative impact on returns from investment, conversely, a rise in the dollar will have a powerfully positive effect. And there are many reasons to believe that the dollar will pick up value against sterling. For a start, US interest rates are expected to continue to rise slowly as they have since June when they went up for the first time in four years. "We believe the dollar is undervalued and in the next 18 months will come up to around $1.50 or $1.55 against the pound," says Alan Adams, a consultant at PFA Alan Steel Asset Management.

He also remains bullish despite fears that the US economy is teetering on the edge of recession. Many fear the effect of private debt which has reached $9.7trn, equivalent to almost 85 per cent of the country's gross domestic product. This is in an economy where consumer spending accounts for 70 per cent of spending.

Mr Adams points out that 2004 has been a record year for corporate earnings and economic growth has continued at 3 to 4 per cent. He adds that demographic factors are also key. "The biggest spending year in most peoples' lives is 47. The number of 47-year-olds in the US will reach a peak in 2007."

One thing most analysts agree on is that US elections do not have a substantial impact on markets. Max King, an investment consultant at Eden Group and Investec Asset Management, says: "Party political identification in the US is less defined by wealth, earnings or economic factors than in Europe. The common factor behind support for Republicans is not adherence to market economics, but religion and attitudes to "moral" issues. "Republicans have their Thatcherites and Democrats have their social democrats, but both are only factions," he adds. "Wall Street has outperformed London in 13 of the past 15 years, and by a massive amount in aggregate. This looks unlikely to change."

These arguments make trading Wall Street shares sound tempting and most UK stockbrokers will provide a US service, but keep a careful eye on fees to ensure you don't end up paying twice. A number of US-based online brokers such as Charles Schwab have UK websites that make buying shares uncomplicated ,whichever side of the Atlantic you trade on.

This makes it easy to diversify a portfolio geographically. It can mean that investments are less vulnerable to national economic fluctuations. The US economy, however, is so powerful that it is unlikely that a substantial fall, or rise, would not be mirrored in the UK.

Incidentally, anybody intending to buy US shares to widen the geographic spread of their portfolio should examine the markets where their UK firms trade. It is hard to find any business in the FTSE-100 that does not have a substantial US presence. A more powerful argument for investing in US stocks is sectoral. If you believe that the automotive, electronics or computer software industries will perform better than average, the choice of UK firms in those sectors is fairly limited.

Beware of believing that safe investment is based solely on brands that are familiar across the globe. Many US-based household names including Coca-Cola, Microsoft and General Motors have seen their share value halved over the past five years and none of them are showing any real sign of a recovery to anything like the level they reached at the start of the millennium.

Familiar names and a common language also makes it simpler to understand US investments than those in other overseas stock markets. Research is also much easier. The US markets are well regulated and most major stocks are liquid enough to make buying and selling straightforward.

Brokers generally ask UK residents to open a separate dollar account for dealing in US shares. To make settlement simpler stock is usually put in the broker's nominee account.

American Express Sharepeople also allows you to hold a variety of currencies in a single account so you can trade in and out of foreign securities without incurring exchange costs. Taxes on US share dealing is slightly more complex. In common with most countries, there is a treaty between the US and the UK, based on the principle that there should not be double taxation. There is one clear benefit in buying US shares - they don't pay Stamp Duty, half-a-per-cent in the UK.

Marc Hackney, associate tax director at financial services group Smith & Williamson explains: "There is a 15 per cent withholding tax under the tax treaty for payments from US corporations to overseas investors. Typically the US requires forms to be completed to ascertain who is receiving a payment from a US corporation."

Companies such as deal4free offer prices on US stocks as well as firms grouped into sectors. "There's no advantage to going to a regular stockbroker," says Geoff Langham, deal4free's head of trading. "They always charge, we don't charge commission and it's difficult going short with them." "Going short" means buying shares on credit in the hope that they will fall in price, so that when you have to pay you can get the same number of shares more cheaply. This will, no doubt, resonate with the newly re-elected president. "One of the common denominators I have found is that expectations rise above that which is expected," as he said four years ago.

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