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American pie in the sky?

Investor sentiment has hit rock bottom in the last few weeks. Figures released by Autif show that net retail sales of £1,234.4m in July were the lowest since October 1998.

Of the new money going into the market, almost a third has been accounted for by the UK all companies sector, while another third has been invested in other UK equity and fixed-income funds.

Once again, volatile markets have driven investors home to UK markets at the expense of European, US, Japanese and even more generalist global funds.

The fund management community has reacted to the testing conditions in a number of ways. While many fund firms have simply kept a low profile, the more proactive have tried to appeal to investors&#39 nervous disposition with the launch of low-risk or capital-protected products. JP Morgan Fleming and Schroders have both announced plans to introduce protected products over the next couple of months.

But a minority of fund managers are feeling more optimistic about the remaining months of the year. While Solus is launching a US fund this autumn, SG Asset Management – which opened its new American growth fund for business in June – is now confidently calling the bottom of the US market and predicting a recovery for the first quarter of 2002.

SGAM American growth fund manager Sam Mercer-Naime believes a combination of inventory corrections, interest rate cuts and President Bush&#39s recent tax reductions are all strong indicators of an imminent economic recovery. He says: “Any slowdown is normally exacerbated by the effects of inventory adjustments, as companies ease up on production and move products out of their inventory. We have seen this happen to a very great effect over the last two quarters.”

As inventories are finally depleted, he believes companies will start to increase production schedules. Mean-while, US Federal Reserve chairman Alan Greenspan&#39s vigorous interest rate cuts will begin to have their intended positive effects on the economy.

Mercer-Naime says: “The first cut was around eight months ago in January. It typically takes six to nine months for rate cuts to have an effect on the economy, so we are very much at the point where the benefits will start to follow through.”

However, at the heart of SGAM&#39s recovery hypothesis is President Bush&#39s recent round of tax cuts. Earlier this year, Bush announced that the tax rate on the first $6,000 of taxable income would be reduced to 10 per cent from 15 per cent. While a tax cut may usually take some time to have its effect on the economy, Bush&#39s decision to make the tax cut retrospective to the start of the current tax year has seen every employed American citizen due a rebate of $300. With the first cheques arriving over the past few weeks, Mercer-Naime says consumer spending is set for a massive boost.

He says: “It is going to dramatically increase disposable income in the US. As this is a structural change, they are likely to spend more of the rebate. Making a few assumptions, we believe growth in the fourth quarter of this year will increase by around 1 per cent purely because of the tax cut.”

While Solus has not been so bold as to call the bottom of the market, it is confident of mediumand long-term prospects in the US. Manager of the investment product group Alaric Gordon admits investor sentiment is flat but is adamant that now is a good time to build a track record for a new fund, even if it does not take much money at the outset.

Although the arguments for US recovery are compelling, there are those who are equally sceptical about the market&#39s prospects. The flip side to Bush&#39s tax cuts is that, with last year&#39s surplus of $200bn expected to turn into a $9bn deficit this year, there is a strong chance the deficit could increase.

Old Mutual Asset Managers economic strategist Nigel Morgan says this could put pressure on both the dollar and interest rates. He says: “It seems the US authorities have almost exhausted their ability to stimulate economic activity. That suggests both activity and prices will be more depressed for longer than had been hoped. A synchronised global economic downturn is in progress and investors and others have depended on very proactive US policies to lift activity generally. Now that burden will pass to others.

“Unemployment is rising, production, orders and profits are falling and, with confidence weak, it is likely the present depressed conditions will last for much of next year. This will restrict the scope for fiscal generosity for some years and may put the dollar and interest rates under pressure as budget deficits crowd out productive investment.”

The combination of interest rate and tax cuts mean the US should at least not see much if any more downside over the coming months.

However, with a US recovery likely to lead the way for stronger economic conditions across Europe and the rest of the world, even the sceptics will be hoping that SGAM&#39s predictions are true.


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