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An American tale

US investors are on the sidelines but a reverse in the weakening dollar leaves plenty of room for upside

One of the reasons that we are so positive on the US today is that the currency situation looks to be finding a level.

One of the factors to have put off UK investors investing in the US is the weakening dollar. We see this trend abating. The pound/dollar rate has been more or less static for the last six months, trending between $1.90 and £2.05, and we see this as a sustainable level.

This will mean that UK investors will be able to benefit from the rising US markets without too much performance being lost via currency.

The earnings’ momentum is still very positive in the US and we see it continuing into the second quarter. Analysts have been behind the curve in assessing the strength of both the domestic market and, more important, the international market. This is where much of the incremental profit is being generated. The top 25 companies in the S&P 500 generate 40 per cent of their sales from abroad and the globalisation story means that this is only likely to increase.

America should not be seen as just a consumer of goods within the global demand supply equation. It is also a key component in the supply of expertise and technology, which emerging nations demand just as much as it seems to have an inexhaustible demand for cheap Asian goods. America is both demand pull and supply push and remains the keystone of the global economy.

Looking at the fund flows, it is safe to say that the US is underweight among the big majority of UK financial advisers’ portfolios. The US is also unloved by its own citizens, with big numbers of investors opting for global equity funds instead of US funds.

Up to the end of June 2007, global funds had attracted $72bn compared with just £11bn for US stock funds. This underinvestment can be seen as a positive sign that the market is not overbought and that when investors return to the US market, there will be a significant amount of money to push the market higher.

With analysts still behind the curve and investors sitting on the sidelines, there is plenty of room for further upside. The market is cheap on a price/ earnings’ basis of 16 times 2007 earnings and, with so much value being created in the market via buybacks and higher dividend payments, investors should stay long in the US.

Markets in August have been very volatile so far, mainly due to the concerns surrounding sub-prime mortgages and a widening of credit spreads, the results of which continue to unfold.

The Neptune US opportunities fund has avoided any exposure to banks and lending institutions as well as property companies and these have been the areas most affected by loans made to poor credit customers.

However, these are not the only market participants affected by these problems. The loans are typically syndicated out as collateralised debt obligations to hedge funds and other investors, who have seen the value of these loans fall dramatically.

This is compounded by the fact that markets are less liquid in the summer months as many money managers are on holiday and this is making the market volatile. This volatility will provide investors with an excellent opportunity to enter for long-term investment as the market is good value and the fundamentals are very much intact.

The likelihood of a cut in interest rates has increased in light of the Fed chair-man’s comments that “downside risks to growth have increased somewhat” due to the ongoing housing correction and tightening credit conditions.

He also said that continued economic expansion was likely, due to “solid growth in employment and incomes and a robust global economy”. We still think that the most likely scenario is that the chairman leaves interest rates on hold at 5.25 per cent for the remainder of the year.

Felix Wintle is head of US Equities at Neptune Investment Management and manager of the Neptune US opportunities fund


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