Will the US lead a global recovery?
America should break out of recession first, so it may well be the best place to invest your ISA
Saturday 14 March 2009
The US has long been the engine of the global economy. While economists and analysts may have spent much of the past few years talking about how the likes of China, India and Brazil are now taking over on the world stage, the economic crisis has shown that this "decoupling" process is far from complete.
As the US slumped into recession last year, the whole world slowed down with it. And though the largest emerging economies have not stopped growing entirely, the days of double-digit annual growth are certainly well behind them.
But while economists remain pessimistic about the global outlook for 2009, there's a growing consensus that the US – which arguably led the world into recession – will be the first to drag itself back out of the quagmire.
Felix Wintle, the manager of Neptune's US Opportunities fund, believes that America's rapid response to the economic crisis will pave the way for a recovery next year. And US the stock market may recover sooner still.
Wintle points out that the US Federal Reserve began cutting interest rates aggressively in January 2008 – reducing them all the way from 5.25 per cent to zero by the end of the year.
In contrast, the UK and European Central Bank didn't start cutting rates until last autumn. "The ECB actually raised rates in the summer of 2008, encapsulating its lack of understanding about what was going on in the global economy," says Wintle. "We've now had drastic cuts in the UK and Europe – but it's come too late. The US is nine or 10 months ahead."
These cuts will still take some time to have their full effect – especially while the credit crunch continues. While US interest rates may now be zero, for example, it's still all but impossible to get a mortgage for anything much less than 5 per cent. So many consumers and businesses are not feeling the full benefits of such low rates.
Furthermore, unemployment appears to be rising still, and it's likely that the economic statistics will continue to get worse over the rest of 2009. As well as continued economic uncertainty, Terry Ewing, a manager of the Ignis American Growth fund, says he believes another obstacle to the market's recovery is the continued lack of clarity in the financial sector. In particular, he says there needs to be a clearer strategy as to how the US government plans to tackle the "toxic assets debacle".
Nevertheless, in spite of all these negatives, fund pickers such as Wintle and Ewing are quick to remind investors that markets tend to begin their recovery when the economic data looks at its worst – not when the green shoots of recovery are starting to show through.
Ewing says that while the next six months remain difficult to call, he believes there's every chance that the market could have rallied by as much as 25 per cent by the end of the year. Between now and then, it's likely to remain volatile, he says, and will retest the lows that it hit last week at least one more time.
Bruce Bittles, the chief investment strategist for the US wealth management group Baird, who has more than 40 years experience in the industry, agrees, and points out that the recent sharp falls in markets are a good indication that we are nearing the bottom. "The Dow is now down for six months in a row," he says. "That never happens. Last time that happened was near the bottom [of the market] in 1970."
With the economy as fragile as it is, however, investing in the US market is still a dangerous activity – and while there are good bargains to be found, it's still possible to lose plenty of money if you make the wrong choices.
Wintle has been focusing his portfolio on the healthcare, retail and industrial sectors over the past few months – and claims there are a number of companies in these areas that will prove relatively recession-proof.
Alexion is one company that he holds – a biotech firm that develops a drug to treat a rare blood disorder. As the only drug for this condition on the market, Wintle says the company should be relatively immune to the recession. Other healthcare companies he's invested in include Biogen Idec, which manufactures drugs for multiple sclerosis sufferers, and Genentech, which is currently being pursued by pharma giant Roche.
Within the retail sector, he says he has focused on companies that are benefitting as consumers try to save money. "Retail is a big sector," he says. "People aren't going to stop spending – Americans love to spend. We decided to go down the 'trading-down' route. We own Wal-Mart, Family Dollar and Dollar Tree – these are discount stores which have had fantastic footfall, and fantastic numbers."
Ewing's fund has followed similar themes. He also picks out agriculture and household goods as two sectors that are throwing up opportunities. Monsanto, the maker of genetically modified food, is one of his holdings – a company which he believes will benefit from the growing global demand for food, and could do particularly well if certain key regions have a bad harvest this year.
Within the household goods sector, Ewing cites Colgate, which has been selling ever more toothpaste to Latin America, and is seeing its profits grow as a result.
One additional potential hazard for British investors putting money into the US at the moment is the weakness of the pound and strength of the dollar. Sterling has slumped from more than $2 to £1 last autumn to less than $1.39 this week. The strength in the dollar has been caused to a large extent by the large amount of money that has poured into US Treasuries (government bonds) over the past few months. Although these are paying very low yields, they are considered the safest asset in the world – and at a time when there are few safe havens, these have inevitably soared in popularity.
Most economists believe that the dollar will not sustain these levels – especially as investors begin to develop a renewed appetite for risk, and move money out of Treasuries again. For the UK investor, this currency movement will detract from potential invest-ment returns.
If you have a large exposure to US markets, it may well be worth hedging against this – either by buying some US dollars (to ensure you receive some benefit when the pound begins to strengthen again), or by using geared instruments such as covered warrants or spread bets.
However, these strategies are only for the sophisticated investors.
Wintle says he does not hedge his portfolio against currency movements. Instead, he points out that some of the companies he invests in will benefit from a weaker dollar – as this will boost their overseas sales and should in turn bolster their profits.
James Daley was a guest of Neptune Investment Management in Chicago earlier this month
US mutual funds The best way in
Unless you're a sophisticated investor, the best way to get exposure to the US is by investing in a mutual fund. If you do that via an ISA, you can put up to £7,200 into a stocks and shares ISA each tax year.
Given the current market volatility, Alan Adam of the Scottish financial advisers Alan Steel Asset Management says the best way to get exposure is to drip your money in on a monthly basis, to ensure you are investing at cheaper levels if the market falls in the short-term.
"We're pretty close to the bottom from a stock market point of view," he says. "But we've probably got another year or year and a half of economic grief to go through. The market will rally towards the end of the year, as people start to look towards a more positive 2010."
"It's going to be an American-led recovery. Everyone's talking about how much money will be spent by governments propping up their economies – the US are spending more than the Iraq war, Korean war, Vietnam war and the entire US space program combined."
Adam recommends the Neptune US opportunities fund, Ignis American Growth and Martin Currie North American funds. The Ignis and the Martin Currie funds are focusing on larger cap stocks, while the Neptune fund has also ventured into the smaller and mid-cap end of the market. These have all performed well recently. The Neptune fund returned almost 50 per cent in the last five years, almost 40 percentage points more than the next best fund.
To find a financial adviser in your area, visit www.unbiased.co.uk.
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