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Investment view

It seems American consumers are still prepared to put their hands into their pockets.

It’s about time that I gave America the once over again. The world’s biggest economy does, after all, possess the world’s biggest stockmarket. The power of investing institutions in the US outguns any other national group of participants in the securities industry. America is the bastion of capitalism. What happens in this market affects us all, sooner or later.

In market index terms, the US has outperformed our own domestic market since the bottom of the bear market was called some two years ago but that is before you look at the effect of currency fluctuations. The new millennium has proved a tough time for the dollar. The overhang of the twin deficit problem and, a period of almost negligible interest rates, have combined to see the US currency driven down to all time lows against other major nations but there have been signs that it may have turned the corner.

While it is true that markets will always fluctuate, the reality is that the once mighty greenback was beginning to look significantly undervalued. It does depend on what measure you look at but if you take purchasing power parity, then you have to admit that the US does appear cheap against Europe, the UK and other developed countries. Why else would shopping trips to New York be so popular?

If PPP gives an indication that the dollar may have fallen too far, it is not the only reason to be a little more optimistic over what might be happening on the other side of the Atlantic. Federal Reserve Bank Chairman Alan Greenspan said recently that interest rates would have to go up further because of the robust nature of the US economy. Already they have reached 2.5 per cent, putting them more in line with the European Central Bank and we seem likely to have a few more hikes yet – and all because American economic activity is on the up.

We had some evidence of this with the better than expected January retail sales figures. Despite dearer money, it seems US consumers are still prepared to put their hands into their pockets. Economic performance is based in no small measure on confidence. That America seems to have regained its poise is confirmed by the buoyant nature of the housing market. Even though unemployment remains high, it appears people are less worried in the US about what the future has in store than might have been expected.This could translate into better stockmarket performance.

That is what many stockmarket commentators appear to be expecting at present. Although inflation has returned as a worry with the result that the bond market has had the odd hiccup, even the prospect of higher interest rates did not seem to be putting off investors. There is bound to be the odd glitch on the way – as last week bore witness. A leap in the price of oil unsettled both equity and foreign exchange markets but, overall, it looks as though support for the world’s largest stockmarket is growing.

Looking at it from the prospective of a UK investor, share valuations do not look very cheap. True, a rebound in the dollar will help overall returns, but you have to wonder how much of a premium over other markets is justified. But with so much activity in the US driven by their own investing institutions, perhaps this is a worry we should put to one side.



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