America inspires mixed feelings
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Despite a downbeat assessment of the American economy by the head of the Federal Reserve, at least one AFI panellist has gone overweight on a positive view of the country’s prospects.
Investors hoping to gauge the strength of the American recovery have received mixed messages in recent weeks. The Federal Reserve’s decision to raise its discount rate by 25 basis points on February 18 prompted fears of tighter monetary policy. However, a downbeat assessment of the economy from Ben Bernanke, the central bank’s chairman, forecast that inflation would remain “subdued for some time”
In his twice-yearly monetary policy report to Congress, Bernanke said growth in the second half of 2009 could mostly be attributed to firms running down inventories. The housing and job markets remained weak, he warned, while bank lending continued to contract.
Below-forecast consumer spending and housing market figures at the end of February appeared to support Bernanke’s bearish view. However, GDP data was better than expected, as the Bureau of Economic Analysis revised its fourthquarter figure upwards by 0.2 percentage points, to 5.9% (see bar chart), to reflect improvements across a range of underlying factors. (article continues below)
Tim Cockerill, the head of research at Ashcourt Rowan and an Adviser Fund Index (AFI) panellist, acknowledges that economic growth does not always lead to strong equity gains. However, he is broadly positive on America and marginally overweight the country, compared with a benchmark comprising the FTSE All-Share and FTSE World ex UK indices. Cockerill says he may increase his exposure further.
In particular, he is looking at “nuances” beyond the headline figures. On housing, for example, he says the high rate of repossessions in America may have been driven by more relaxed attitudes to foreclosure among homeowners than in previous cycles.
“What we have been seeing in the data may be worse than things really are,” he says. “I think the US is going to come out ok and there will be some surprises on the upside. I am more positive on the US than the UK–the UK could suffer a double-dip, but we won’t see that in the US.”
The decision for British investors is further complicated by the exchange rate exposure involved in buying American stocks. The pound has weakened against the dollar (see line graph) and last week fell below $1.50, its lowest since May 2009, as fears over Britain’s weak fiscal position were compounded by concerns that the general election would result in a hung parliament.
Gavekal, an economics research firm, has forecast a ”dollar bull market” and both Cockerill and Mick Gilligan, the head of fund research at Killik, expect the currency to strengthen further against sterling, providing an added boost for British investors with unhedged exposure. “I am much more positive on the dollar than on sterling,” says Gilligan. “The deficit positions [of America and Britain] are similar in many ways, but the US economy is more flexible.”
In terms of fund selection, Cockerill favours M&G American as a core holding. The fund, run by Aled Smith, was selected for the AFI Aggressive and Balanced indices last November–by one and two advisers respectively. As a satellite position, Cockerill also uses Schroder US Mid Cap. The £340m fund, managed by Jenny Jones, was re-badged from Schroder US Small and Mid-Cap last year.
Cockerill is also re-assessing Legg Mason’s US Equity portfolio, which had a torrid 2008 but recovered strongly last year. According to Financial Express, the fund generated a return of over 25% in 2009, compared with 19% for the Investment Management Association’s North America sector. AFI support has dwindled, but the fund maintains a presence in the Aggressive and Balanced indices.
Gilligan, meanwhile, prefers Findlay Park American Smaller Companies, mainly because it has a significant weighting in Latin America. According to Findlay Park Partners, the portfolio had an 11% allocation to the region at the end of January. “I am not bullish on the US, but I am bullish on the high-growth parts of the world such as Latin America and Asia,” says Gilligan.
Exposure to American equities fell by one percentage point to 12% in the Aggressive index in the November rebalancing. Allocations remained steady in the Balanced and Cautious indices, at 9% and 4% respectively. Gartmore US Growth and JP Morgan US were ejected from the AFI.
