The United States is still the world’s biggest economy, yet it is shunned by British retail investors who prefer to keep their money at home. But the US economic recovery is key to a wider global economic recovery – and the prospects look a great deal rosier than they did a few months ago.
“Prices and yields make US equities the best asset class in the world right now,” says Hersh Cohen, chief investment officer at Legg Mason subsidiary ClearBridge Advisors. “American stocks have discounted a very negative scenario and high quality stocks have discounted the worst possible scenario. We can’t find any areas of the market that are overpriced. But companies are flush with cash and are being aggressive with dividends and share buy backs.”
Certainly the S&P500 has had a stellar few months buoyed by positive economic data, which have exceeded analysts’ expectations.
Manufacturing continues to impress with the Institute for Supply Management’s (ISM) manufacturing survey moving to 53.9, up from 52.7—where a reading above 50 indicates expansion—while new orders rose to 57.6 from 56.7. The ISM Manufacturing Index has tended to be one of the better predictors of share prices movements.
The US is repaying debts faster than its western counterparts – both at a corporate and household level. Combined government and household debt in the US is already lower than Spain (363 per cent), France (346 per cent), and Italy (314 per cent), and may undercut Germany (278 per cent) before long.
The positive news flow has helped the S&P to its highest level since last August and is up around 20 per cent since October.
Alan Steel, the Linlithgow-based financial adviser who is an avid reader of US commentary, reckons that whether the world resumes its growth or stumbles into decline, the US will be the”unexpected” winner.
Steel says: “The USis not only in my view the benign elephant in the room, but also a safe harbour in the expected storm.”
Steel’s optimism appears to be shared by American investors, if the readings of the Chicago Board Options Exchange Volatility Index (Vix) are anything to go by.
The Vix, also popularly known as the “Fear Index”, is falling and last month hit its lowest level since 2010.
The Vix tends to rise when stocks fall. The index measures the cost of options that are bought to insure against equity losses, and its level indicates how worried professional investors are about more share price falls. The measure rose above 80 during the worst of the 2008 financial crisis yet was back below 20 at the end of last month.
Some analysts reckon all the economic data points to another “Jackson Hole” moment for shares – named after the town where Federal Reserve chairman Ben Bernanke gave a speech that sparked a stock market surge. Now analysts wonder whether this is the start of another rally.
Credit Suisse analyst Andrew Garthwaite says there are big changes afoot that are creating a more benign environment for stocks. The US economy is looking stronger than many predicted, with notable movement in the long-dormant housing market, where sales of previously-owned homes just rose to an 11-month high.
In China, whose manufacturing sector has been showing signs of slowing, policymakers have demonstrated a willingness to make conditions easier by lowering banks’ capital reserve requirements.
“As we approach our year-end target we have to ask ourselves the following questions: What has changed? Will equities rally further?” Garthwaite said in a research note.
His answer to the second question was yes. Credit Suisse raised its year-end S&P 500 target to 1,400 from 1,340.
Charles Schwab is equally upbeat and reckons that the pessimists will be wrong. “There continues to be a cacophony of naysayers, but we have remained optimistic that the US will again be able to defy predictions of incessant stagnation,” said Kully Samra, Schwab’s UK branch director.
The stockbroker admits that there are some “monumental” challenges to tackle, but economic momentum has accelerated.
“We believe this could be setting the stage for a sustainable move higher by stocks thanks to relatively attractive valuations, continued solid earnings and improving economic data, and the ’Wall of Worry’ pervading sentiment. In the past, these ingredients have boosted equities,” added Samra.
America remains not just the world’s biggest economy but also one of the most flexible, and several experts expect it to lead global recovery. Whether DC pension or Sipp savers hold US-specific funds – a highly niche area – the US economy will heavily influence pension fund performance in 2012.
Most pension funds follow traditional benchmarks and, as such, their asset allocation is heavily skewed towards western markets.
But before everyone gets carried away with the US economy, big as it may be, analysts point out that it cannot decouple itself from events in Europe, or China for that matter.
Garthwaite admits that Credit Suisse is not overweight in equities, because the risks of a “more severe recession in Europe and a slowdown Stateside were still there”.
Meanwhile, Tom Walker, the highly-regarded fund manager at Martin Currie, tempers his enthusiasm by adding some caution. He notes the data highlights that US consumer demand is still strong, especially for the right products, particularly goods manufactured by those technology brands which are perceived as essential to modern lifestyles (Google and Apple being the two most obvious examples).
“Crucially, US companies are generally in a healthy state. Overriding concerns over global growth and the eventual outcome for the Euro are, however, tempering the enthusiasm generated by this encouraging news,” he said.
“It seems unlikely the US can fully decouple from the crisis in the Eurozone although should the more positive economic momentum in the US continue, it may give investors some hope that a global recession is not inevitable. Whatever the outcome, US companies and US equities look positioned to perform well, at least in a relative sense, in the coming months.
THE ADVISERS’ VIEW
Andrew Merricks, Skerritt Consultants
“I’m not a big fan of US funds per se, but it’s very difficult to invest without any exposure to the US market. It’s notoriously difficult to find a consistent manager for US exposure, so I’d tend to use an S&P tracker if I want simple broad exposure to the US market.
Where I do use funds with a large US bias is within sector plays, particularly healthcare, energy or technology, as well as high yield bonds. I think that high yield bonds are a penalty kick at the moment, particularly if you’re looking for income.
Although they’ve recovered somewhat from their autumn wobbles, something like the JP Morgan High Yield Bond fund is still offering around 8 per cent from a widely spread portfolio.
Bearing in mind that bonds can only ever default or mature, the implied default rate still seems high for me if the US is not as bad as everyone was forecasting, with interest rates guaranteed to stay low for a good while yet.”
Alan Steel, Alan Steel Asset Mgt.
“I’ve been pro the US economy for over a year – for good reason. The biggest secret is manufacturing employment has grown faster there than in any other leading manufacturing economy since early 2009 and has added more jobs since the start of 2010 than all the rest of the G7 put together. Not that you would have guessed with all the focus on job losses. And General Motors has not only bounced back from bankruptcy three years ago, paying back all it’s loans to Government, but it has already regained it’s position as the top selling car maker in the World.
“Threadneedle seems to call the US market well. Jenny Jones at Schroder is good value in rising markets, but investors may prefer an each way bet – US exposure plus other themes played in one fund such as Graham French at M&G Global Basics and his colleague Stuart Rhodes at M&G Global Dividend. I own them both.”
Election year rally?
There is another potential fillip for the US. It is a Presidential election year and so the omens are good, if you believe the chartists.
The S&P 500, a broadly based index of US shares, has fallen in only three presidential election years since 1952, according to David Schwartz, the stock market historian.
The index fell by about 3 per cent in 1960, when John F Kennedy was elected, by 10 per cent in 2000, when George W Bush was voted into office, and by 38 per cent in 2008, when Lehman Brothers collapsed and Barack Obama won. In the other 12 election years over the period, the S&P his risen, seven times by double-digit percentages.
Schwartz says: “I think the US market will rise this year. What’s intriguing about America at the moment is that the economy is really coming alive. Last year it was like a spring being pulled tighter and tighter – now the market is ready to rebound. The election will also play a part.”
Alan Steel says: “History may tell us the Presidential election year is good for the US stock market, but I’d rather stick to the value argument. With corporate cash at record high levels and long term borrowings at record lows, the US looks good value to those separating emotion from common sense.”
