Chatfeild-Roberts: US on path to Japan-style deflation

25 November 2009 5:27 pm | By Hannah Smith

Speaking in a teleconference for investors today, the manager of the Jupiter Merlin funds said that the American consumer still faces a range of challenges despite efforts to reduce levels of borrowing and start saving. One in nine Americans now receive food stamps, which is an indication of how the nation is struggling through recession.

“It has been an extraordinary couple of years. US debt-to-GDP has been climbing at an extraordinary rate since the 1980s. We have seen quantitative easing, bailouts, zero interest rates as well as outliers such as emerging markets wishing to grow strongly,” he said.

“The US consumer does appear to be reacting to the situation by increasing saving and reducing borrowing. But unemployment is the worst it has been in all post-war recessions. There is no doubt this is a pretty bad one in terms of the real economy.”

Chatfeild-Roberts points to several positive economic indicators in the country, but questions whether these are simply short-term improvements caused by quantitative easing.

“There are, as they say, green shoots - pending homes sales in the States have seen a trend upwards, manufacturing and production has gone up which tends to be a leading indicator, residential property has bottomed out although commercial property has not turned around yet. Is this sustainable or merely a result of the stimulus put in?” he said.

“The consumer is still under considerable pressure from over-leverage and unemployment. Deflation in the Japanese style is the near-term worry,” he added.

Meanwhile, in terms of changes to the Merlin portfolios, Chatfeild-Roberts has begun moving back into technology stocks for the first time since 2000. “This has been an area unloved by investors for a long time, but you have companies there with top line growth, cash on their balance sheets, and potentially a Windows 7 upgrade cycle, so we think that is quite interesting,” he said.

Elsewhere, the manager has had an overweight to emerging markets, notably Asia, for the whole of 2009, which he says was the right tactic for this year. “We will continue with that overweight,” he said. “It has the ability to become a bit of a bubble but for now it is where the opportunities lie.

“Closer to home, large companies with good dividends may be more interesting next year than this,” he added.

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