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Brian Tora: US equities are still looking fair value

Brian Tora MM blog side

December can be a funny old month for investors. The so-called festive effect, where shares rise towards the end of the year as managers ensure the cash balances on their portfolios are properly utilised, is not a given but is increasingly expected.

This year it will be the fiscal cliff that will loom over investor sentiment. But how much of a concern should the twin pressures of tax rises and spending cuts in the US be to us in Europe?

The risk, of course, is that these measures go ahead unimpeded, placing the fragile recovery of the world’s largest economy in jeopardy. If fears that this might happen percolate through to markets, then the pressure to achieve some form of accommodation will intensify. On the plus side the elections left the legislature less polarised, but it remains the biggest doubt over where markets might travel as the year draws to a close.

Elsewhere in the US signs are just as opaque. On the corporate front an impressive recovery in profits that followed savage cost cutting in 2009 has now run its course. Third quarter results showed little, if any, progress and managers are cautious over spending plans, given the uncertainty generated by potential tax and spending issues. In America this is fast becoming the top media story, which suggests politicians will need to reach an agreement.

Remarkably, consumer confidence has recovered to pre-2008 levels, perhaps a consequence of an improving housing market.

Given the importance of domestic consumption and residential housing to the US economy, such developments can only be considered as positive and a welcome counterbalance to the less upbeat news emerging from the corporate sector. Certainly, consumer stocks have been at the forefront of recent market strength.

But perhaps the most interesting recent development has been the resurgence of America as an oil producing nation. The exploitation of shale gas deposits has been well documented, but oil from shale deposits is also a developing theme, while a positive boom in pipeline and other oil and gas related infrastructure projects are now underway.

The US is believed capable of overtaking Saudi Arabia as the world’s largest oil producer well within the next decade.

Meanwhile, in the financial sector, American banks have succeeded in recapitalising and are awash with liquidity. Junk bonds have acquired a new status recently, driven in no small measure by a hunt for income.

How much both trends are down to quantitative easing is far from certain and an end to this programme could impinge on markets. Indeed, here – as in so many other areas – the future looks less than certain.

For investors the US has been one of the better places in which to entrust your money this year. Even after allowing for the dollar’s decline against sterling, American equities have returned a positive 10 per cent so far this year – double the rise on the domestic front.

At current levels shares look no better than fair value, particularly given the hesitant outlook for company profits, but at least they are not ferociously expensive. Still, I’m encouraged by the deep division between the bulls and the bears on US markets.

America is not a market easily written off. In the 1990s, when popular wisdom had investors pouring their money into Far Eastern markets, the US was quietly stealing a march on everyone by building its technology capability. Their markets trounced those of Asia. Today the world’s leading technology businesses are US corporations.

A recent report into emerging economies suggested that, while they had undoubtedly made ground up on the States, it might only be temporary. Perhaps the fiscal cliff will present a buying opportunity.

Brian Tora is an associate with investment managers JM Finn & Co


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