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Adviser Fund Index

Investors hoping to determine the strength of the US recovery have received mixed messages recently.

The Federal Reserve’s decision to raise its discount rate by 25 basis points on February 18 prompted fears of tighter monetary policy. However, a downbeat assessment of the economy from Ben Bernanke, the Central Bank’s chairman, forecast inflation would remain “subdued for some time”.

In his semi-annual monetary policy report to Congress, Bernanke said growth in the second half of 2009 could mostly be attributed to firms running down inventories. The housing and job markets remained weak, he warned, while bank lending continued to contract.

Below-forecast consumer spending and housing market figures, published at the end of February, seemed to support Bernanke’s view. However, GDP data was better than expected as the Bureau of Economic Analysis revised its fourthquarter figure upwards by 0.2 percentage points, to 5.9 per cent, to reflect improvements across a range of underlying factors.

Ashcourt Rowan head of research and AFI panellist Tim Cockerill says economic growth does not always lead to strong gains for equity investors. However, he is broadly positive on the US outlook and marginally overweight in the US, compared with a benchmark comprising
the FTSE All-share and FTSE World ex UK.

Cockerill says he may raise his exposure further and is looking for “nuances” beyond the headline figures. On housing, he says the high number of repossessions in America may have been driven by more relaxed attitudes to foreclosure among homeowners than in previous cycles. “The data may be worse than things really are,” he says.

The decision for British investors is further complicated by the exchange rate exposure involved in buying US stocks. The pound has weakened against the dollar this year and last week fell below $1.50, its lowest level since May 2009, as fears over Britain’s weak fiscal position were compounded by concerns over a hung Parliament after the general election.

Both Cockerill and Killik head of fund research Mick Gilligan expect that the currency will strengthen further against sterling, providing an added boost for UK investors with unhedged exposure.

“I am much more positive on the dollar than on sterling,” says Gilligan. “The deficit positions of America and Britain are similar in many ways
but the American economy is more flexible.”

Exposure to US equities fell by one percentage point to 12 per cent in the AFI Aggressive index during the November rebalancing. Allocations remained steady in the balanced and cautious indices, at 9 per cent and 4 per cent respectively.

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