Testing times for American market
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Brian Tora, Fund Strategy contributorGiven how much of what has been happening in global markets and economies has been driven by events in America, it seems remarkable that it has been a year-and-a-half since last I cast my attention towards the world’s largest economy. But given how poorly shares there have performed, perhaps it is as well that I have ignored it. But it is to America that we are all looking for deliverance, so an examination of what has been going on over there is worthwhile.
It does no harm to reflect on the fact that the seeds of the crisis that so unsettled financial markets and reversed the direction of the global economy were sown three years ago. In 2006 the American housing market had already peaked, although the decline in values was modest initially. The first real cracks started to appear when, at the end of 2006, two sub-prime lenders went into administration.
Such was the turmoil that ensued that, even over a five-year period, the average American fund has failed to make money. This is despite a significant rebound in share values since the trough of March this year. The 35% recovery that has taken place in the S&P 500 index has been insufficient to help most funds, with the one-year average performance down not far short of a fifth in value.
Indeed, the one-year performance tables to the end of May show that there were no funds in positive territory. Neptune’s US Opportunities fund, which has delivered an impressive performance – topping the tables over one, three and five years, was almost at break even, but you would have lost more than a third in the worst-performing funds. Three and five year figures are worse, with the Legg Mason US Equity fund propping up the list, having fallen by about 40%.
Neptune and Legg Mason, at either end of the tables, show a consistency that is lacking elsewhere in the rankings. Gartmore and Newton are the only fund groups to appear more than once in the top five, aside from Neptune, and even they fail to make all three time frames, although they do enjoy consistent first-quartile performance. It does show how hard the world’s largest stockmarket has been for investment managers during a time of unprecedented financial developments.
The behaviour of the dollar has made the situation more difficult. After a period of prolonged weakness, a flight to quality in the wake of the deteriorating global economic situation led to a marked recovery in the fortunes of the greenback. More recently, as equilibrium has returned in some measure and the appetite for risk has made a come back, the dollar has once again encountered selling pressure.
This is shown to good effect in the relationship between sterling and the dollar. After peaking at over $2 to the pound, sterling fell to about $1.36 – a fall of more than a third. While some of this was a consequence of specific concerns over the strength of the domestic economy – sterling weakened against the euro, too – the subsequent rebound in the pound’s fortunes was primarily the result of investors dumping the dollar. Today, the rate is $1.63 to the pound – a recovery of a fifth in a remarkably short period.
The issue for currency investors is how America is going to fund its vast deficits. Just as it has relied on East Asian governments and investors in the past, so it is the still expanding economies of Asia that are having to pick up the tab today. The only difference is that it is China, rather than Japan, putting its hand in its pocket and purchase US Treasury Bills.
Such is their exposure to the dollar that the Chinese authorities have no wish to de-stabilise the dollar further. Moreover, they have an interest in the return of the American consumer as a buyer of their goods, so a return to prosperity will benefit all. So far, the signs are mixed. While there is some reason to believe the worst of the falls in the American housing market are overs, any recovery is unlikely to be swift and the extent of value destruction has been considerable. American homes have fallen much more in value than those in Britain.
In the wider economy the automobile industry has attracted most attention recently. The collapse of General Motors and Chrysler underscore how manufacturing industries are continuing to migrate east. The unemployment likely to result will drain the American economy, so unsurprisingly many forecasters are cautious over immediate prospects.
Yet there are some encouraging signs. Confidence surveys have started to pick up and purchasing managers are beginning to sound more hopeful that the corner has been turned. There are plenty who believe that America, having led the world into a financial crisis of massive proportions and an economic downturn of a severity not seen for a generation, will be leading the rest of us out.
America has proved a testing market for investors and their advisers for some time. This summer is likely to see a continuation of the bad news we have come to expect, but there are reasons to be cheerful. Picking the right fund will be crucial, but with a new president and an outward looking administration, there is no reason to leave America out of a growth investor’s asset allocation mix.
