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America could lead way back

The US may have played a large part in the financial meltdown but leading fund managers believe it could be the first country to emerge from the recession and help lead the global economy out of trouble.

Schroders head of US large cap equities Jonathan Armitage says: “Having been the first to enter, the US is likely to be the first to come out but there will be more volatility in the next six to 12 months.”

Armitage says there are many growth opportunities in US equities, with technology stocks particularly attractive.

He says: “They are huge cash generators so they look very attractive indeed. We focus on software rather than hardware. For example, Dell is likely to continue to find life difficult in the short term but the recurring revenues of software companies make them attractive. We do not think there will be the significant drop-off in technology spending that we saw in 2001-02.”

On financials, he is wary of traditional commercial lending banks as he believes credit losses are likely to be higher than investors are anticipating and instead favours insurance companies.

He also says new president Barack Obama is doing a good job of managing expectations: “He is pretty blunt. He said the other day that more banks will go bust. This is realistic and very likely.”

Franklin Templeton US opportunities fund manager Grant Bowers also believes the US will be the first to emerge from the economic downturn and says there are a lot of opportunities to make money in the current environment.

He says: “If you look back, historically, the stockmarkets always start to improve before the economic data begins to improve. Well before we see any tangible recovery in the numbers, equities will start to perform well.”

Franklin Templeton launched the US opportunities Oeic fund in the UK in January this year. It is a mirror fund of the Luxemburg-domiciled Sicav fund that has been running for nine years in the US and has returned -4.59 per cent over five years compared with the Russell 3000 growth index return of -15.59 per cent.

Bowers says now is a good time for growth investing. “Growth has been outperforming value over the last 12 months. Global equity is at an unprecedented level and valuations are very attractive. It is a great backdrop for equities to outperform.”

His fund has a diversified approach, seeking the best companies in every industry. The fund is currently overweight in healthcare, although Bowers does not favour large- cap pharmaceuticals, saying they are too slow and plodding, and has gone for biotech and medical technology companies such as Genentech and Myriad Genetics where there are better opportunities for growth.

He says the energy sector, including alternative energy, is very attractive with opportunities in solar, wind and water as well as oil since the price has come down.

“We are very long-term- focused. It is not just about the next six to 12 months. Alternative energy will be an ever increasing part of our global economy.”

Bowers says he remains very cautious on both financials and consumer goods.

Martin Currie North American fund manager Tom Walker says his strategy is to invest in a combination of companies that do not have any funding problems.

The fund has posted a return of 13 per cent over five years to December 31, 2008 against the MSCI North America index benchmark of 14.6 per cent.

Walker is very cautious about the financial sector and says he is nervous about banks and whether they are going to be nationalised.

He says: “There is a lot more bad news on the credit front to come through. One can identify the banks that will survive. We do hold JP Morgan but we are very cautious. The credit cycle has some way to run.”

The fund is also underweight in the energy and materials sectors, partly because Walker does not think there will be a return to the levels of excessive consumption that has been seen in the last decade.

He favours stocks such as Wal-Mart and McDonalds which he believes will pick up market share as consumers trade down and he is excited by the potential in technology stocks. “We could well look back in years to come and say what a great opportunity to buy such great companies. Apple is still growing and has a phenomenal amount of cash. It is still gaining market share from PCs and the iPhone and iPod have been a great success. Google is also a high-growth company.”

He says Hewlett Packard and IBM still offer good opportunities but their focus is more on saving costs rather than growing market share.

Oil and gas exploration and production stocks are trading at a significant discount to their asset value and Walker also sees potential in this sector.

Neptune US opportunities fund manager Felix Wintle is another fan of healthcare stocks and says he has been overweight in this sector for around a year. “In a world of uncertainty they have got very stable cashflow and stable earnings’ growth.”

He also favours materials and commodities and says the fund has been riding the bounce in these stocks which came off the back of Barack Obama’s election victory last November.

Wintle says: “We also like energy here, with oil down below $40 a barrel, we think that is a very attractive area. We like some industrial companies as well.”

The fund has returned 48.25 per cent over five years against the S&P 500 total return of 11.47 per cent.

Surprisingly, perhaps, Wintle still holds two housebuilding companies and says that some sectors price in green shoots of recovery in the economy a long way ahead of time and housebuilding seems to be one.

“Sometimes it can be priced in 12 months ahead and you cannot actually even see it in the fundamentals. We saw that recovery happening in the housebuilding sector – a very odd sector to be in, you might think, but it is very interesting that the homebuilders have outperformed the S&P really quite dramatically since June.”

Wintle says while we are still not into a general recovery there are opportunities available. He says: “I do not think the US economy has bottomed. We are not out of the woods yet but the good thing about the US is there is always an opportunity to make money because the market is so big, so diverse and because it is not overanalysed.”


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