Last Tuesday morning I picked up The Wall Street Journal in my Chicago hotel room. “Stocks hit ’97 level, signalling long slump”; “Dow’s plunge below 6800 comes as investors bet on a sustained earnings downturn”. Hardly the headlines that Felix Wintle, manager of Neptune’s US Opportunities fund, wanted as he presented to a group of journalists on why now might just be the time to invest in America.
Or perhaps they are precisely the headlines that should propel investors to look at America. Yesterday American shares were good value. Today they are sensationally cheap. Wintle and his colleagues at Neptune are convinced that America is now the most attractive market in the world for investors, in both relative and absolute terms.
He reckons the dollar will remain firm and America will lead the world out of recession, and as a fund manager he finds an embarrassment of riches to choose from among American stocks. “You’ve got to look at the context of how far we have fallen already,” he says. “Markets will recover when sentiment is at its worst.”
Wintle is not about to ring the bell signalling the bottom of the market, but evidently he believes we may be close to the point of maximum capitulation.
Many British investors will be cautious about buying dollar assets, given how far sterling has fallen against the greenback. Surely any gains to be made from America will be swiftly wiped out by a revival in sterling? Wintle thinks not. “Sterling is structurally compromised against the dollar because the UK economy is so moribund,” he says. He reckons America will continue to benefit from the flight to quality as investors globally regard US Treasuries as the assets of last resort.
He also reckons that currency markets point to America as
the first large economy likely to come out of recession.
When you order a Martini and enjoy the mesmerising night-time views from the top of Chicago’s Hancock Tower, it’s difficult to imagine America is in the grip of its worst recession for decades. Yet down at street level America is losing close to one million jobs a month. Economic output slumped at an annualised rate of 6.2% in the last quarter of 2008. Consumer confidence is as frozen as the Michigan lakeshore.
But Americans, optimists by nature, cling to the belief that America, having led the world into this mess, will lead us out.
But what will be the catalyst that sparks a recovery? The answer, according to Wintle, is “when things are getting bad less quickly”. And the pointer he is looking for is when house prices stop falling. He has started buying some “super early cycle housebuilders” such as Pulte. It was trading at $46 in mid-2005, but is now about $8 (£6). It plunged throughout 2006 and 2007, but stabilised in 2008. Back in 2006 it was telling us that a major crack was opening up in America’s residential market, but we chose to ignore it. The fact that it now defies the continued flow of bad news may be telling us that the worst is over.
Amid our anger over grubby Fred’s pension and the gruesome FTSE, it’s easy to forget it was the delinquency rate among subprime mortgages in America that started this crisis.
Banks simply can’t put a price on the subprime mortgage packages that Wall Street conned the rest of the world into buying. Once house prices stabilise, so will these toxic assets, and, the thinking goes, they could even be revalued upwards. Hey presto, banks stabilise and the crisis starts to fade.
Trouble is, there’s no evidence yet that American house prices have hit bottom. They have fallen even faster than in Britain – already down 36% since their peak – and, as unemployment climbs towards 10%, few are brave enough to call the bottom of the property market.
Wintle took us to meet one of the top investment strategists in America, Bruce Brittles of RW Baird. It is to Neptune’s credit that it was happy to put us in front of experts who were hardly banging the drum for America’s economy. Brittles says that the recovery that only weeks ago he thought might begin in late 2009 is not likely to start until 2010. And don’t expect it to be vibrant – with GDP expansion of little more than 1%.
But as we all know, the stockmarket will recover before the economy. Brittles reckons sentiment is “bearish to extreme”, that we are in a “severe recession” and that unemployment is exploding. But commodity prices (particularly agricultural products grown in America) are firm, and unlike the early 1930s, money supply is growing.
Inflation won’t be a problem through 2009 and 2010, even if it becomes one later, and indicators from the futures market suggest that there is the potential for a sustainable rally in equities.
We also met Sara Lee, headquartered in Chicago and best known for chocolate gateaux, but which operates a huge number of brands and had revenues last year of $13 billion. Its share price has dived from $14.90 to $6.90 since last April, even though sales, albeit under pressure in some countries, are relatively robust and it has limited debt.
Wintle reckons the market has not priced in a lot of restructuring the group has carried out in recent years, improving margins in businesses such as packaged meats and exiting less profitable product lines. But the company admits its toughest market is Spain (where it owns the country’s biggest bread maker), followed by Britain and France. I find interesting the flood of bad economic news coming out about France – one of the supposed core Euro countries that didn’t follow the Anglo-Saxon model, yet it still seems to be suffering just as badly.
Other consumer discretionary stocks Wintle holds are Wal-Mart, Family Dollar and Dollar Tree – all expected to benefit as hard-pressed consumers trade down.
But it’s probably the healthcare sector – and biotech in particular – where Wintle is most excited about opportunities, and not just because he has held Genentech. “It’s definitely the most attractive part of the market at the moment,” he says, unfazed by President Obama’s policy moves in this area.
– Patrick Collinson was a guest of Neptune Investment Management in Chicago.