A weak dollar drives exports up and, despite the global slowdown and fears of a recession, the American stockmarket still holds global giants and investors ignore the region at their peril.
Given that it is the world’s largest economy and possesses the biggest stockmarket by far, it is remarkable how America can slip off the radar screen of British investors. Back in the mid-1990s, investment in America was eschewed in favour of East Asia. Yet during this period the American economy made great strides forward and shares there delivered handsome returns, particularly in the technology sector, which was dominated by American giants like Microsoft. Asia, on the other hand, suffered from a credit crisis all of its own and failed to live up to earlier promise.
More recently the excuse for ignoring America has been the decline in the dollar and, of course, the state of the housing market there, problems which precipitated the global credit crunch. Today much of the talk in the dealing rooms of London surrounds the likelihood of a recession developing across the other side of the Atlantic and the consequences for the rest of us. None of this makes for comfortable investing, but are we wrong to continue to write off this mammoth market?
That America is going through a tough period is evident. Just recently it was the fall in the number of people in employment that gave the market the jitters. In practice the jobless figure has not looked too daunting, but that is because of the large number of illegal workers in America that keep labour costs down and act as a cushion when economic conditions turn down.
If it is the effect that a slowdown is having on employment, it makes sense to look at the repatriation of cash to Mexico, which turned down significantly more than a year ago. In other words, the American economy has been retrenching for some little while. The slack in the labour market has been taken up by workers who do not feature in the official statistics – until now, that is. All this suggests a recession is all but unavoidable.
Times are different this time around, though. Just as the arguments that emerging markets, the prosperity of which is down in no small measure to the appetite of American consumers, have largely decoupled from the fortunes of America is gaining ground, so the weakness of the dollar is creating opportunities for American business. Indeed, the important decoupling that may be taking place is that of the fortunes of the American economy from the ubiquitous American consumer.
Which is not to say a recession can be avoided. Several leading investment banks are saying it has already arrived. Both Goldman Sachs and Merrill Lynch have published their arguments for believing the American economy is experiencing a significant downturn. Given the continuing bad news coming from the housing market there, this is hardly a surprise. But not all the data is bad. Exports, driven by a cheaper dollar, are on the up. The American consumer may indeed be declining in economic performance.
It looks as though the enfranchisement of populations in developing nations is shifting demand from America and the rest of the West. The growth of consumerism in East Asia, Russia and South America is coming at a time when America may be able to benefit as a consequence of its skills base and the relative cheapness of the dollar. This could limit the depth and length of any recession. Rather perversely, just as American economic activity is demonstrably slowing, it may be just the time to reconsider this market as the cornerstone investment proposition it represents.
Comparing the performance of American funds with those of, for example, emerging markets demonstrates what a tough time managers have been having. During the five-year run of this latest bull market, against a fivefold increase in the value of the best performing emerging markets fund, the leader in the American stakes could muster a rise of only 83%. Even the best performing smaller companies fund, managed by Schroder, has barely doubled in price. America has not been the place to be recently.
Examining the shorter timeframe tables tells much the same story, with performances at the top coming in at half the emerging markets numbers for North American funds. There is, though, a remarkable degree of consistency among American fund managers, with Neptune leading over six months, one year, three years and five years. Gartmore, too, features strongly, remaining first quartile throughout all timeframes. And the variance in performance achieved is not as great as in many sectors.
With so much of the action in international markets taking place in the developing world, America has tended to fall out of favour. And its economic problems are far from illusory, although the weak dollar should help to correct the large trade deficit over time. Most important for investors is that valuation levels for shares look undemanding on a historical perspective. While slowing economic activity will hit corporate profitability, there is nothing like the vulnerability to a correction that existed, for example, at the end of the dotcom boom.
There is a range of funds and management styles from which to choose if you are seeking to gain exposure to the world’s largest stockmarket. This year promises to be tricky on the world stage. Those who, like me, believe risk in portfolios
should be reduced as far as possible could do a lot worse than build their equity content around those companies in America that continue to lead the world in so many areas.