A turn for the worse

2 August 2010 8:00 am | By Chris Salih

The latest Bank of America Merrill Lynch survey reveals that a fall in risk appetite and growth expectations has seen global fund managers slash their weightings to the US in favour of cash.

Having previously held an average net 20 per cent overweight in US equities in June, global asset allocators took a 7 per cent underweight stance this month as concerns for the outlook for US equities hit their highest level since November 2006.

The US is also the region fund managers say they most want to underweight in the next year, a first since November 2007.

The past 12 months has shown an indifferent story for US equities. Over a 12-month period, the North America sector was the 10th best-performing IMA sector, according to Morningstar figures, returning 22.88 per cent.

However, the sector has experienced a turn for the worse in the past three months, with the average fund down by 10.17 per cent, making it one of the worst-performing sectors in that timeframe.

The US economy grew at an annualised rate of 2.7 per cent in the first quarter of 2010, having come out of recession last year. But high unemployment and lower levels of manufacturing have raised concerns that the recovery may be set to hit the wall.

Martin Currie North America fund manager Tom Walker believes much of the concern is down to the weak economic data released in June and the failure to tackle unem-ployment. He says the apparent weaknesses have raised the question of whether the economy is drifting back into recession or whether it is just a pause in the recovery.

He says: “I am of the latter school of thought as no recovery happens in a straight line and it is a question of seeing the data for July and August. The economy is certainly fragile and I am expecting a fragile recovery.”

Walker says the team is currently underweight in banks as the credit cycle looks set to be drawn out in the long term.

He says: “Regulation is going to be a headwind for banks for a number of years. The banks could be re-rated as more certainty is applied from the reform bill but the fact is that banks have been over-leveraged for a number of years and as you reduce the leverage you reduce the return on equities and the rating. Although the bill has been passed, the devil will be in the detail.”

Schroders US mid-cap fund manager Jenny Jones says that despite the volatility within global markets, there are still a number of opportunities in the US mid-cap space and that the market will reward companies with strong fundamentals as it settles down later this year.

She says the fund’s commitment to “steady Eddie” stocks - stable firms that generate dependable earnings and revenues - will be beneficial.

She says: “Holdings that tie into this theme include W.R. Berkley, the property insurance company. It was the chief contributor over the month of May and increased its annual cash dividend rate by 17 per cent. As an insurer of the Transocean-BP rig, the company is boosting premiums on deep water oil rig insurance by 40 per cent following the spill in the Gulf of Mexico.”

The average US equity fund was down 10.17 per cent over the last three months, making it one of the worstperforming sectors in that period

US Federal Reserve chairman Ben Bernanke raised more concerns last week when he said the country’s economic outlook remains “unusually uncertain”.

Bernanke believes interest rates still need to support the recovery, with the Fed prepared to offer “further policy actions” to boost the economy if necessary. But Bernanke downplayed concerns the US will re-enter recession.

JP Morgan Asset Management vicepresident of US client portfolios Marc Shaw says the firm is cautiously optimistic on the outlook for the US at present.

He says: “On a company-by-company basis it is actually fairly positive. However, there is caution. The corporates are in great shape in terms of debt levels, cash on their balance sheets, really strong margins and solid earnings. The doubts in the recovery come from the likes of China slowing down, the eurozone and the Gulf of Mexico.”

Shaw says the technology sector is also a stand-out attraction.

“We are starting to see capital spend in technology, which tends to mean employment six months down the line. Large caps also look attractive at present. Companies that are in good shape to benefit from the corporate spending growth cycle are best positioned to take advan-tage, hence the likes of technology and media.”

Skerritt Consultants head of investments Andy Merricks says: “We are still not directly invested in the US, though we hold stocks in energy and pharma. The problem is there always seems to be some sector outstripping it, whether it be emerging markets on the upside or bonds or cash on the downside. The US dollar looks set to weaken on top of Bernanke’s comments, which is also likely to keep us away for the time being.”

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