US offers best protection against euro disaster, say experts
While no equity markets would be immune from a full-blown meltdown on the continent, the US’s abundant natural resources and domestically focused economy mean it would be relatively well insulated.
By Jenna Voigt, Features Editor, FE Trustnet
Friday September 14, 2012
Investors looking to preserve their capital in the event of further bad news from the eurozone could do a lot worse than increasing their exposure to the US, according to Frances Hudson, global thematic strategist at Standard Life Investments.
Hudson says the US would be less dependent on trade with other countries, particularly if it became more self-sufficient through shale gas production, further removing the economy from the fate of the eurozone.
The comments come on the back of a recent FE Trustnet
poll, in which a slim majority of respondents favoured the world’s largest economy to stave off a blow from Europe and protect their capital.
As central banks move towards more growth-oriented fiscal policies, experts say there are fewer places to turn to to preserve capital.
Mike Lenhoff, chief strategist at Brewin Dolphin, says the US economy has surged following US Federal Reserve chairman Ben Bernanke’s announcement of a third round of potentially unlimited quantitative easing (QE) yesterday.
US stocks shot up and the currency fell to its lowest level against the euro since May.
Gold gained 1.84 per cent on the news, to $1,766.75 per troy ounce yesterday, and continued its climb this morning, gaining nearly 4 per cent to $1,772.90 per troy ounce.
Gold performance over one month vs FTSE 100
Source: FE Analytics
Lenhoff pointed out that mid and small caps in the US rose to all-time highs after the policy was announced.
"We have chosen for a while now to be overweight in the US market and that has been the right decision," he said.
"The area that’s most favourable if you’re going to take a bit of risk is Wall Street. And I would add emerging markets to that too."
However, he says in terms of a defensive play, he was not sure where to run because markets continue to be volatile and investors would not pile into government bonds at current levels.
"I feel the defensive play is somewhat exhausted now," he added.
Hudson also said that if there was an outright collapse of the eurozone, no one would be immune.
"I don’t think anyone has priced that in or made contingency plans. It’s not anybody’s majority view."
She added that the risk asset rally in the market could be short lived, as investors begin to wonder where the next threat will come from.
"Everywhere bounced except China because of speculation about the Chinese leader. I still don’t get the impression the markets are running on fundamentals."
North American funds have traditionally been inconsistent performers, with only the £520.5m AXA Framlington American Growth fund appearing in the top-five funds in the IMA North America sector over both three and five years.
Top-performing funds over 5-yrs
Source: FE Analytics
Additionally, the US faces a number of potential roadblocks to economic growth in the coming months as the country nears the November presidential election and "fiscal cliff" at the end of the year.
Lenhoff says the Japanese market was likely the most removed from the fate of the rest of the world; however, he says he would not recommend using Japanese equities to defend investors’ capital.
"Japan doesn’t seem to take its lead from elsewhere; however, it’s not my first choice, or my second choice, or my third choice," he commented.
Only 10 per cent of FE Trustnet
readers said Japan was the most likely economy to shield investors’ capital from a full eurozone collapse.