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Do you bet your bottom dollar?

Even the experts are undecided on future movements of the weakened dollar, meaning investors must carefully weigh up the risks of investing in the US, says Will Henley

With the pound punching through the two dollar mark, Britons jetting across the Atlantic are enjoying bargain-priced consumer goods but those who have invested in the US stockmarket are seeing returns squeezed by the weakened dollar.

Should investors rid themselves of US shares or is now a good time to bite into the American pie?

Bestinvest director Justin Modray says: “When the dollar weakens, the returns for sterling reduce.”

Any gains in an overseas investment will be eroded by a weakening of the currency so gains must more than match any reduction in the currency to show a profit.

Neptune Investment Management head of US equities Felix Wintle says: “You have to consider the capital appreciation minus the effect of the currency. If the currency goes against you, it is a major problem.

“It has really affected returns and has deterred people from investing in the US via UK funds. It has been worrying investors for the last three or four years as the dollar has been on a downward path.”

Hargreaves Lansdown head of research Mark Dampier says: “Traditionally, the currency has always gone the wrong way at the wrong time. The market goes up and the currency goes the other way and vice versa. The outcome is that clients do not make as much money.”

Wintle believes the dollar is beginning to turn the corner, so investors should stick with their holdings. He says: “A lot of the dollar depreciation is behind us now. Hopefully, the depreciation of the dollar is going to abate and perhaps turn round in the near to medium term.

“We think now is a good time for UK investors to get involved with the US. We are due for a reversal or a slowing down of the rate. You do not want to be investing in stocks at a high, you want to invest as they rise. You want to be investing when the pound is worth $2, not $1.60.”

But Modray says changes in economic conditions are notoriously hard to predict and he is sceptical of a major turn-round in the value of the dollar in the near future. He says: “The dollar is unlikely to strengthen significantly in the short term and could even weaken slightly. But we will not see it changing that much any time soon. It is not a bad time to invest but now is not necessarily the opportune moment to go in.”

He says the key indicator to look at is US interest rates. “If interest rates fall, it could lead to a further weakening,” says Modray.

Other risks to the dollar include the US trade deficit and the danger that China might choose to flood the market with its dollar reserves. Modray says: “There is a risk that the dollar will depreciate if it cannot rebalance its massive trade deficit with countries like China but it will be a tough uphill battle to do so.”

However, investors in the US may be boosted by returns from export-orientated companies, such as those in the industrial and materials sectors. Martin Currie North American fund manager Tom Walker says: “The weak dollar benefits many US companies. American companies exposed to international markets are suddenly finding their exports are far more competitive.

“It is also possible that overseas companies will use the relative strength of their domestic currencies to acquire cheap US companies, thereby underpinning valuations.”

Walker says investors must weigh up the US against other markets, such as Asia. “Looking forward, inflation remains a concern but less so than it was a few months ago. The housing market remains troubled and we still see risks in this sector. The wider risk is that the US consumer loses confidence but we are confident that the strong job market should help to offset any impact here.”

But Walker is bullish about the prospects for US stocks. He says: “We expect solid earning’s announcements to continue and earning’s growth in the high single digits seems likely. Valuations still appear supportive. There is no doubt that for variety and quality of companies, the American market is hard to beat.”

Dampier says: “The pound could yet hit $2.10 so now is not suddenly a buying opportunity. It is really the relationship between the euro and dollar that counts. That is what drags sterling higher. If the euro cracks, the pound will be hit as well but I do not think that will happen for the time being.”

But Dampier says the doomsayers would be wrong to write off the US because of the weak dollar.

He says: “The American market regularly confounds the sceptics. Some would say there is a chance of recession but it looks like growth will be at 2 to 3 per cent. I suspect while it is unfashionable and unloved, investors in the US will continue to do relatively well.”


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