Your IndustryFeb 18 2013

Investing in the US - February 2013

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Approx.50min

    Investing in the US - February 2013

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      CPD
      Approx.50min
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      Introduction

      By Jenny Lowe
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      Research reveals that between October 1990 and March 2000 – a period that included the end of the eight-month recession between July 1990 and March 1991 – the S&P 500 index closed at ‘all time highs’ no less than 308 times.

      This is a significant number when compared with the recovery market following the 1980s recession between 1982 and 1987 which only saw the stockmarket reach an ‘all-time high’ of 152 times.

      Kully Samra, UK branch director of Charles Schwab, says: “There are four phases in a bull market – reluctance, consolidation, acceptance and exuberance. In the first and fourth phase you get the best performance. The US is in the exuberance phase at the moment. It’s not irrational exuberance so maybe we could see an all-time high in the S&P 500 [index] soon.”

      In spite of the -0.1 per cent contraction in output growth in the fourth quarter of 2012, the US stockmarket has performed well in recent years.

      Based on discrete calendar year returns since 2009, the S&P 500 index has delivered double-digit returns in every year bar one – 2011, when it only returned 2.1 per cent. 2009 was the best in the time period, with a 26.5 per cent return.

      Having withdrawn $600bn (£383.4bn) from the US mutual fund market, according to Mr Samra, investors are now creeping back in. January has seen $50bn re-enter the market, although this is no where near the volumes seen before 2008.

      Russ Koesterich, BlackRock’s chief investment strategist, says: “Flows into equity mutual funds and exchange-traded funds have been relatively high lately, a sign that investors are growing less risk averse. Stocks have certainly benefited from the modestly positive trends in economic growth and it does appear that investors are making some long-awaited moves back into equity markets.

      “We continue to favour mega-cap US stocks, which should benefit from the improvements in the global economy.

      “In contrast, we would exercise more caution when considering consumer sectors and smaller-cap companies. Small caps have done quite well so far this year, but they may be relatively vulnerable. From a valuation perspective, small caps look somewhat expensive to us.”

      Mr Koesterich adds, however, that he is expecting the pace of flows to moderate, “which could make this area of the market vulnerable, particularly if we see any pullback in consumer spending”.

      Invesco Perpetual’s head of US equities Simon Laing argues, however, that a lack of longer-term action will deter private investment in the US.

      “In spite of a deal on the fiscal cliff there are still broader issues to tackle in 2013,” he says. “The lacklustre growth in private US investment is in large part due to a lack of confidence in the long-term fiscal situation. However the US understands this point well, demonstrated by Fed chairman Ben Bernanke’s decisive action.

      “He was well ahead of everyone else as the economic crisis unfolded and has committed publicly to low interest rates through 2014. You can agree or disagree with quantitative easing (QE) but this is likely to continue for the next two years.

      “What makes us positive on the US in navigating these issues, is that it has the benefits of its own currency being the world’s reserve currency, and a banking system that is pretty well capitalised and getting stronger.”

      Managers focusing on the US market claim there are a number of things supporting US growth projections in the coming years – the recovering US housing market, for example.

      Others include low natural gas prices – a benefit for both US consumers and manufacturers – and shale oil discoveries which are having an effect on oil prices and boosting infrastructure spend.

      Mr Samra adds: “People got scared about the recent contraction in GDP, but if you look at the composite it really isn’t that bad because some of that was driven by hurricane Sandy and some by reduced government spending. On the other side, both construction spending and housing spending was up.

      “Valuations are attractive and, along with a pick up in M&A activity, that will start to attract investors back to the US market.

      “However, we would like to see a little bit of froth removed from the market because on a short-term basis there is a lot of sentiment that is over-reaching a little bit. Everything we are seeing means the market can continue to go up.”

      Jenny Lowe is features editor at Investment Adviser

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