Stellar returns with a profit explosion
Psigma American growth fund manager James Abate
If you look at the returns in the US market as a whole, it really has been a stellar performer across the universe of choices that UK investors have in recent times.
It is true that historically it has been tough to invest in the US because sometimes the markets are right but the currency is wrong, and vice versa. But now we have had the Greek crisis, which has been a transformational event because it will spread and will persist for years. As a result, the dollar will prosper and sterling will be closer to the euro.
All this, compounded by a favourable market backdrop, means that UK investors underweight in the US should be thinking again.
Of late, there has been the most far-reaching and most efficacious restructuring in corporate America that I have ever witnessed.
You have a number of companies that took out a tremendous amount of cost and dumped a lot of assets that were underperforming and now the economy is stabilising, we are starting to see an explosion of profit margins and returns on capital.
We see many opportunities in the best blue chips, where things have been good and they are getting better. The Apples, the Googles, the Coca-Colas – things have been good for them because in the recession they solidified their high market shares and maintained their dominance in their underlying industries during the recession.
But then there is a tremendous opportunity with the companies that might have been doing the wrong things during the boom in terms of asset allocation but in the recession they found religion. Firms like Starbucks that reduced its store growth dramatically in the downturn. These are firms that found it tough a year ago but because they laid the groundwork we are seeing sequential improvement.
All in all, people are underestimating quite how much operational gearing will drive profit growth in the US.
Well placed to carry on growing
Fidelity American special situations fund manager Adrian Brass
The US was the first major economy to go into recession and it has also taken arguably the most extensive acts in terms of stimulus and company cost-cutting.
Of all the Western economies, the US is very well positioned to carry on growing at a superior rate because it is closer to cleansing the reasons for the economic slowdown, namely the housing market and the banking sector.
We are already more than a year into the recovery and so a lot of cyclical stocks have been re-rated and our view is the early-cycle stocks – consumer discretionary and industrials – are already pricing in a decent chunk of that recovery. We are moving out of them and into late-cycle stocks like semi-conductors and healthcare equipment, but also homebuilding and construction.
We are underweight in financials but I do own some because the large-cap banks are looking extremely cheap right now and their fundamentals are improving in terms of loan losses. However, there is a huge overhang in terms of regulation that may hit them from many different sides, so they look cheap but the potential for regulatory risk does raise more questions.
The Western world is going to have a serious constraint for growth for many years to come. But in times of leanness, flexibility is a very important virtue. US unemployment rates are high because it is a flexible economy and because corporates can downsize quickly. Japanese and European corporates are less flexible and it has been harder for them to downsize, which makes them structurally less profitable than their US counterparts.
Tilt towards austerity in America
Newton American fund manager Simon Laing
In the US right now, it is good news tinged with bad news wherever you look, so while there is a recovery going on, seen in the GDP data and industrial data, there are a lot of conflicting data points out there as jobless figures are not as good as we would like and lead indicators are rolling over too.
Because of the macro risk, US funds have to tilt towards stable growers – companies that do not need a sustained GDP growth. You can get some firms that are in very strong growth areas like the life sciences – firms making the equipment that scientists are using globally for medical testing, food science testing and industrial testing. These are all the things that will continue to grow despite the macro environment as they are endmarkets that are not credit-fuelled.
Ultimately, we have to be aware that the US economy is in a similar position to some of the European countries. It will probably be next year that the US government faces this and takes measures. In 2011, it will be a much tougher climate.
We are positioning for any austerity measures already because the last two years have taught us that when these changes occur they occur dramatically. It is extremely difficult to change completely and tilt your portfolio mid-crisis so you have to prepare for these things now.
We would like to think that the companies we are investing in have a better chance of withstanding the US’s attempts to deal with fiscal austerity in the coming years.
Technology sector is a beacon
Swip US equities investment director Nick Ford
At the moment, the US economic outlook is hazy. As fund managers, we have to remain vigilant, lest any surprises come lurching out of the mist, catching the market unawares.
The technology sector is a welcome beacon. It is currently experiencing stronger growth than we have seen for at least a decade.
A sharp rise in essential capital expenditure is shielding the sector from the vagaries experienced by other economically sensitive areas of the market. Companies are having to upgrade networks and meet demands for increased bandwidth.
Microsoft’s product upgrade cycle appears to be leading the way. Its new Windows 7 operating system has received a much better reception than the previous Vista and XP efforts. Additionally, the increasing popularity of smartphones is a huge plus. Service providers are moving away from so-called “all you can eat” packages and towards those that charge according to the amount of data downloaded. This indicates that current network infrastructure is struggling to cope with the demands being placed on it. The need to extensively overhaul these systems represents a huge boon for the technology companies with the ideas and resources to do so.
Acme Packet is one of the individual stocks that we like. A leading provider of internet protocol services for corporate technology networks, it lists 98 of the top 100 communications service providers among its clients.