• Fund Information
• Investment Analyser
• Investment Team
• Market Views
• Investment Updates

Market views - USA

December 2009

The US is at a fascinating juncture with a dramatically improved picture when compared to the recent past. Economic data looks much better with a whole variety of indicators demonstrating that recovery is taking place. This is most obvious in the industrial parts of the economy where the stimulus package is having the greatest impact. Increasingly, market commentators are talking about a more normal world where growth continues to recover. Consensus economic forecasts for the US now show a decline of 2.4% for this calendar year followed by a decent bounce next year to a growth rate of 2.7%

As usual, equity markets have been ahead of the game with a dramatic bounce off the March lows led by the more cyclical and higher leveraged companies. The further the bounce has run the more investors have gained confidence about the future. Whilst this argument is clearly circular, it is the usual way of things. In turn, market valuations that were compellingly cheap now look fairly valued.

We think it is time to take a step back and try to understand what the economy is doing and what the longer term prospects actually are. First and foremost, policy levers are still fully engaged. By this, we mean that interest rates remain incredibly low and the vast fiscal stimulus package is still being implemented. These factors put a floor under the economy and will allow some growth to form. But, and it’s a big but, consumers are still deleveraging and corporates are still very cautious about committing to increased capital spending. These are large components of the economy and are quite likely to remain a drag for sometime yet.

In the next few years we expect short shallow economic cycles with continued reduction of debt by the beleaguered consumer. Similarly, the corporate sector will continue to shed employees and keep costs under control most notably by not investing for future growth (therefore little or no growth in capital expenditure). Our central case is for trend GDP growth to be in the region of 1.5% with a range of approximately -0.5% to 2.5%

In the short term, this raises some concerns. Should economic recovery moderate here despite very strong policy stimulus then we fear that equity markets look rather vulnerable. We are not forecasting a crash, but feel that the easy returns are already on board and that some form of correction in markets is quite likely. Similarly, defensive and high quality companies should now see a return in favour after significantly underperforming the market since the March low.

In sum, we suggest a slightly more balanced approach to portfolios with a reduced position in cyclical and leveraged companies to finance an increase in more defensive, stable names that have underperformed the market and once again look attractively valued.

Page last updated December, 2009 ID1719