Many investors will have wished that they had avoided the US stock markets altogether over the past 12 months. It has been the worst performing IMA equity sector after Japan, with the strong dollar dampening returns for UK investors. Anyone who had relied on the historic adage that the US tends to lead world stock markets out of recession has been sorely disappointed.
On the face of it, 2010 does not look like being much better. The US faces similar problems to the UK in terms of high government and personal debt, a weakening currency and a stagnant housing market. Deleveraging is necessary and as a result GDP growth is expected to be lacklustre. It is losing its global economic dominance to the East. Is this picture accurate? And can US funds deliver better performance against this backdrop next year?
Bill Miller, manager of the Legg Mason Value Trust, believes that the strength of GDP growth may surprise investors as jobs growth returns in the first quarter of 2010. He says that growth of 8-9 per cent is not impossible. With predictions currently sitting around 2.5-3 per cent, this is a bold call, but he says GDP growth has typically reflected the magnitude of the previous fall.
Markets would welcome higher growth, but Miller believes valuations look attractive anyway: "This is one of the clearer times for the stock market. The outlook for equities is as good as it has been for some time. The market has consistently been too cautious and conservative."
He says that historically, periods of very weak returns have been followed by very strong returns. He is also encouraged by the number of US companies beating expectations and raising guidance.
Darius McDermott, managing director of Chelsea Financial Services, agrees that even if GDP remains nearer consensus forecasts, the stock market may still do well. He says: "You look where global growth is coming from over the next three years and it’s probably not going to be the States. However, it does not mean the market can’t do well. US companies have significant overseas earnings."
Simon Laing, manager of the Newton American fund, believes the US stock market is likely to outperform both the UK and Europe, based on a stronger corporate sector and better demographics. He says: "The US is dynamic. Its open immigration policy makes its demographics more attractive. Also, the culture is naturally entrepreneurial. Its vibrant corporate sector will stand it in very good stead." He also sees good valuations.
While there are reasons to think that the US may be a better place to invest in 2010, for UK investors the direction of the dollar will be crucial. Currencies are notoriously fickle and most funds do not hedge. Many are predicting a lengthy decline for sterling, but there has been some improvement in recent months.
Miller believes that the dollar is likely to be volatile but will not depreciate significantly from here. Laing believes it may weaken against Asian currencies, but is likely to stay at around these levels against sterling.
UK investors have historically been under-allocated to the US. McDermott says that it makes up between 40 per cent and 50 per cent of the MSCI world index and only 4 per cent of his clients portfolios.
The outlook for US growth is likely to be better-than-expected, the global focus of many of its companies should boost the stock market and the currency is likely to be more stable, so investors ignore it at their peril.
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| Click here for IMA North America sector: What the papers say |
| Click here for IMA North America sector: North America funds in focus |
| Click here for IMA North America sector: IFAs viewpoint |