Investors wary of Wall Street
British fund managers warn against sending big sums over the ocean
Sunday 20 August 1995
The US stock market showed further spectacular growth in the first half of this year. But that surge has now stalled, and there is plenty of evidence that small investors in the UK should hold off before placing their pounds with Uncle Sam. The Dow Jones index of 30 leading companies started the year at 3,834. By 19 July, it had improved an impressive 23 per cent to 4,736, with some analysts predicting it would hit 5,000 by Christmas. It has since fallen back by about 100 points, influenced by some profit- taking in technology stocks and a gloomy bond market. Many UK analysts, studying America from London, believe Wall Street is already defying gravity and see a slump just around the corner.
Walter Downey, a senior vice-president at Fidelity's Boston office, sums up the American view: "Today the US economy is the most attractive major industrial economy in the world. We have a stock market with a great deal of momentum and an interest-rate background that is extremely favourable. We're capturing share of world trade almost for the first time in my lifetime."
After two years of rapid growth, Mr Downey argues that the US has achieved the "soft landing" that economists everywhere seek.
But British fund managers fear renewed faster growth in America will lead to the need for interest-rate rises to control inflation, currently at a modest 3 per cent, before the market can settle down to sustainable growth in late 1996 or early 1997.
"We see this as a growth pause rather than the real end of the cycle," says Rhys Herbert, senior economist at Prudential Portfolio Managers. "We wouldn't really buy into this soft landing forecast." American interest rates peaked at 6 per cent in early February after a year of steady increases and were cut back to 5.75 per cent in early July. Wall Street has, if anything, been hoping for further interest-rate cuts, and any return to rising rates will hit prices hard.
Russ Swansen, who manages the Prudential Portfolio Managers' investment operation in Chicago, says: "The stock market has been placing a pretty rich value on things and is also expecting that corporate earnings will continue to grow in a robust fashion. If you find that corporate earnings do not emerge as people expect, the markets will take that hard. Is the stock market extremely overvalued? Maybe not. But I think it's at its upper limits."
John Betteridge, Mr Swan-sen's opposite number at PPM in London, adds: "You either get a slowing down of the economy that is enough to ensure that inflation isn't getting to be a problem or you get continuing strong earnings, and the US market has been having the best of both worlds."
Jim McCabe, who manages the Capel Cure-Myers American Emerging Markets trust from London, says: "The long-term future for the US as a place to invest is actually extremely good. But, whether the timing is right, I'm a bit dubious. Apart from being overweight in technology and mildly overweight in financials, I'm not taking any big bets. The reason for that is the outlook is unclear."
Mr Swansen adds: "I would be reluctant to say to a UK investor, 'Now's the time to sell your UK stocks and buy US stocks'. I think the UK stock market looks like better value. But I would say, 'Sell your Japanese stocks and buy US stocks.' "
If you decide to invest in the US you may want to select a fund that is overweight in one of these areas (ask your chosen fund manager or IFA for details):
Technology Stocks: These stocks have led much of the Dow's recent growth, with the average tech stock up 29 per cent in the first six months of this year. There was profit-taking in July but American domination of global computer markets and a plethora of small companies ripe for takeover should ensure there is still long-term mileage.
Banks: Forecasts suggest the number of US banks will fall by as much as 25 per cent in the next five years, mostly through mergers and acquisitions. Walter Downey, of Fidelity, says: "The job is only a third to a half done. And there's plenty of room for any investor to do well from this very big change."
Smaller companies: Many analysts believe this is where the greatest value in the US market is now to be found, as global companies such as Coca-Cola, Ford, and Procter & Gamble become fully valued.
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