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The case for the United States

Created:

29 June 2009

Updated:

2 July 2009

Written by:

Maike Currie

Despite the US market recovering 39 per cent since March to the end of May - considerably more than the UK - the news from across the Atlantic remains bleak: rising unemployment, plummeting house prices and major industrial bankruptcies. But as America gears up for Independence Day, fund managers focusing on the US believe the country will soon have more grounds for celebration.

First in, first out

Fidelity investment guru Anthony Bolton is the highest-profile commentator to be convinced that the US, being the first into the downturn, is most likely to be the country leading the world out of the global recession. Mr Bolton expects the third quarter of this year to signal a turnaround in America's fortunes and he is not alone in his views.

"We see plenty of reasons why the US will be the first major economy to recover," says Matthew Strachan, head of North American Equities at Alliance Trust. "Companies in America responded very quickly to the downturn by trimming costs, managing their balance sheets to cash and, most notably, running down their inventory levels very aggressively. While this has been one of the factors behind the steep fall in GDP [gross domestic product], there is only so much inventory that you can take out of the system, and we may now be at a point where some of that inventory needs to be built back."

Mr Strachan also expects stability to return to the US housing market, which has been in a downturn for several years now and is a lot further on in the cycle. "Prices have fallen far enough, and interest rates have come down enough, to enable those individuals, able to put down equity, to buy houses again."

Mr Strachan further adds that in terms of capital spending, President Barack Obama's $787bn (£477bn) stimulus package is only really expected to kick in during the second half of this year.

What recovery will look like

So, if the US is the country to lead the world out of recession, what will the recovery look like? "It is not going to be a runaway recovery," responds Mr Strachan, saying that while consumer spending has made up 70 per cent of the US economy in the past, he does not anticipate this to be the engine of the recovery, as the combination of falling property prices and a weak stock market could lead households to save more and spend less.

He is more positive on infrastructural areas and technology companies. "Both these sectors have very international markets and are set to benefit from emerging Asian markets maturing and investing in their products."

Despite seeing value in certain sectors, Mr Strachan is cautious on the prospects of a recovery in the short term, expecting markets to remain volatile going forward, but adds that over a longer time horizon - two to three years – he is confident that the US will engage a recovery.

Or maybe not?

Despite the strong arguments favouring a US-led recovery, Alan Brierley, head of investment companies research at Collins Stewart, is not convinced that the underlying structural issues in the US have been addressed. "Leverage was arguably the key driver of the global financial crisis and very little has been done to address this. The latest flow of funds data shows that total debt in the US continues to grow. While much has been made of deleveraging, gearing levels have actually increased. The prospect of a W-shaped recovery remains a real threat with high oil prices, rising unemployment, and further declines in the commercial and residential real estate market continuing to act as a millstone for the US economy."

Mr Brierley believes it is too soon to be looking across the Atlantic and says it may be some time before the US enters a sustainable recovery - and if the recovery does come, the risk is that it could be very anaemic.

Meera Patel, research analyst at Hargreaves Lansdown, shares Mr Brierley's scepticism. "We have yet to see major improvements in the sub-prime mortgage market, which was the trigger for this crisis. Until we start to see an improvement here and in the unemployment figures, I am not convinced the US will be the first out," she says. "Much also depends on how quickly the US stimulus plans will work. The scenario I am factoring in is that the emerging markets were the last in and they could be the first out of this downturn, given the strength of their economies."

However, Felix Wintle, manager of the Neptune US Opportunities Fund, points out that one of the best ways to play emerging economies is via US companies. "American companies dominate in virtually every area of global growth. There is no better way to play the growth story in these economies than via the US."

Mr Wintle sees growth opportunities in the materials and mining sector, agriculture, and energy space. "Just take agriculture as an example. We all know the world needs more food and for this you need fertiliser, machinery and seeds - US companies lead in all these areas."

Gary Potter, co-head of Thames River Capital's multi-manager team, agrees: "The US has some of the most leading technology businesses, many of the best consumer branded companies as well as the biggest healthcare companies in the world. Through these high-quality blue chips you are not just investing in America - you are investing globally."

An active or passive play?

The freeing up of credit markets in the US, allowing companies to start borrowing and investing again, the return of M&A activity and a general improvement in the confidence of US consumers, are just a few factors presenting compelling opportunities at a company level - but should you be getting exposure to these companies via an active fund, or opt for a more passive approach?

Despite a number of active funds posing attractive investment opportunities, with performance figures to boot, the problem most often cited with active management is that very few fund managers consistently manage to beat the market.

Ms Patel says that if you can do it cheaply, a passive approach can have its attractions, and there are several trackers and exchange-traded funds (ETFs) offering exposure to the US.

Paul Carne, manager on the F&C funds of funds team, says all their funds get their US exposure via passive vehicles. "Our focus is very defensive and therefore concentrated around large caps, which an ETF tracking the major US index will give you good exposure to. However, more bullish investors could do well to use an active manager in order to move down the caps scale."

However, Mr Potter is adamant that an active investment approach is more suited in the current economic environment. "Now is precisely the wrong time to adopt an index approach - it is during these volatile periods where good active managers can add value and are likely to significantly outperform passives," he says.