sift carefully for us gems among its many lemons

Louis Coke is more optimistic than some about the US economy and explains how he takes his positive views fowards into an investment strategy.

sift carefully for us gems among its many lemons


There are a number of factors that set the US apart from other countries and economies which one has to consider when investing funds.

First and foremost, the US has the world’s reserve currency. The benefit this has on the economy cannot be underestimated – essentially, there is a captive market of institutions and investors who have no choice but to hold dollars, thereby allowing some flexibility when it comes to the QE-style programs that the Fed has used during the past few years.

There has been talk over recent years of the decline of the dollar as the world’s reserve currency (and indeed one day this may be the case) but so far we still see commodities, financial products and big business deals all transacted in the trusty greenback.

US energy boon

Secondly, and something that perhaps the US is not always given credit for, is its oil production. The US is actually the world’s third largest producer of oil, behind only Saudi Arabia and Russia, according to 2010 statistics. Indeed, the US government believes that its production of ‘tight oil’ will double to over 1.2m barrels per day by 2035, with total production getting up to an estimated 6.7m barrels per day by 2020.

A mobile labour market is also an added benefit. While people are naturally settled in their various areas, should employment be flagging in one part of the country, such is the diversification of the economy and breadth of industries that many workers can move around the country to find work. This, coupled with the country’s labour laws, give companies extra flexibility and allows a slightly more opportunistic attitude to business if necessary.

Recent home sales data released from the US is also broadly positive although this must be taken with a pinch of salt. There is no doubt that the number of mortgages in negative equity is quite staggering, and the prices paid at the top of the market absolutely unfathomable now, it is nevertheless encouraging that new homes are actually selling.

I have no doubt that it will take the US and the other Western economies longer to recover from this recession than others, primarily due to the relative amount of debt that has been taken on over the past decade or two, but if the theory holds that the first economy into recession is the first economy out of it, the US certainly deserves great consideration.

There are risks, most notably in the US in the form of debt. Both households and government are indebted to the tune of trillions of dollars, with some states such as California (the world’s 7th largest economy at one stage) suffering quite acute financial stress. It may not be too much of an exaggeration to say that if the US did not have the dollar, this debt problem may have caused severe problems many years before now.

What does this mean for asset allocation?

We do not believe that this is the time for big bets but a weighting to the US deserves careful consideration. As to the method of achieving this exposure, I prefer using the actively managed collective route rather than passive methods, unless a portfolio is of sufficient size whereby one can invest directly in US equities in order to gain exposure to the quality end of the market, rather than speculative, growth-dependent stocks.

Ignore the US at your peril. It may not be as true as it once was that the US and UK are very aligned economically, trade with our neighbour across the pond and their subsequent demand for global goods and commodities is a powerful force, even in a recession. It is for this reason that we still recommend most clients have exposure to the US market, although being selective in this process is a vital part of investment in the region.

There are some gems, but they may be surrounded by lemons!



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