May 2007

Home of the Brave

Many pre and post retirement investment strategists will have been looking towards China, India or perhaps even emerging Europe for that extra spark of overseas equity growth last year, and there is no reason to suppose that may not continue. But how about something a little less volatile for the country that still has the largest economy in the world? I am talking of course of the good old US of A.

Have I lost my marbles? Have I read any of the economic data coming out of America? I am no economist but I have heard a few things.

The dollar is, at the time of writing, just above the $2 to the £1 mark with most spreads showing it falling still further: The economy is slowing, growth down to 2.3% in the first quarter of 2007 compared to 3.3% in 2006: More than 25 US lenders are reportedly in difficulty, and New Century Financial, one of the largest sub-prime lenders has filed for Chapter 11 bankruptcy: and apparently there is something going on in the Middle East.

Well it is for these, and many more bad news stories that I agree with those who are saying that the time is right to go back to the USA.

Let's look at the exchange rate.

The fall against sterling diluted a 10% climb in the Dow in dollar terms to a 3% fall in sterling last year. The $2 to £1 rate, nearly a 15 year low, is widely expected to recover, driven in part by a fall in US interest rates. Why would the Fed cut US interest rates? Exactly for the reasons that I have mentioned above. Inflationary pressures have eased with the economy slowing by 1% in the first quarter of 2007 allowing the Fed to loosen the purse strings somewhat.

There are also signs that the domestic housing market is nearing the bottom. A turn around, even a small one, perhaps towards the end of 2007, will help US consumer confidence and hence stimulate the economy.

All of these should push up the Dow, S&P, NASDAQ or whatever American market you prefer.

But importantly the expected fall in interest rates should also help to pull back the value of the dollar. Simple mathematics tell me that if the US market stays flat, returning nothing this year in dollar terms, but the dollar moves to $1.80 against sterling, then my clients will be sitting on an 11% gain (yes 11% not 10% - check it!)

A 7% dollar return in the markets with the same move in the exchange rates would result in a gain of almost 19% in sterling terms.

This in the largest economy in the world - not an emerging nation that has just joined the EU.

Clearly the figures count against and work the other way if I'm wrong!

The traditional home for large cap US investors may have been Fidelity American, but with Jason Weiner replaced by Artis Vatis recently, we are holding a watching brief on this fund.

An alternative must be Stephen Kelly's AXA Framlington American Growth, or Neptune's US Opportunities Fund.

For something a little more spicy how about Jenny B Jones and her highly rated Schroders US Smaller Companies Fund - 5 stars from Morningstar, AA Rated by Standard and Poors and an Alpha of 5.66 - she must be doing something right.

I think it's time to join her!

Tony Clements
IFA
Park Row Corporate and Private Clients