Despite some positive signs in the US economy and the aversion of a fiscal cliff slump, multi-managers like Robin Hepworth (pictured) and Hector Kilpatrick have mixed views on the opportunities for growth.
US house prices are rising and a manufacturing renaissance is blooming. President Barack Obama has raised taxes on the wealthiest 2% of the population and pushed back the majority of spending cuts for three months. Yet the fiscal cliff scare is casting a long shadow across multi-asset managers’ minds.
‘The day of reckoning has been pushed back,’ he said. ‘But the payroll tax holiday has been cut and they have increased spending cuts, which is at least a 1% drag on the economy [over the next 12 months].
‘If I had to put in a guess at the end of the year, US economic growth would be at 0% or minus 1%.’
Keeping allocation low
Hepworth said the political advantage had switched from the Democrats, pushing for higher taxes on the wealthy, to the Republicans, wanting to increase spending cuts, as both sides negotiated the debt ceiling.
He invests around 10% of his fund in US equities, in sectors such as technology, where he said the US was a world leader. He also invests in cheap gas via stocks such as oilfield services company Baker Hughes.
But he said he tried to avoid the US because its fiscal position was the worst in the world and it was an expensive market. ‘If the deficit is 8% and they have got to reduce that to at least 2%, [then] that’s a 6% hit to the economy,’ he said. ‘There’s no way around it: paying down that debt will reduce economic growth.’
His Ecclesiastical Amity fund has returned 23% over the past five years, compared with the FTSE World’s 19.9% over the same period.
Hector Kilpatrick (pictured above), chief investment officer at Cornelian Asset Management, has recently become more positive on the US.
Cornelian, which runs around £180 million in multi-asset discretionary portfolios, took the view at the end of last year that investors were becoming complacent, and Kilpatrick bought a FTSE 100 short for some protection against the downside. He later modified his view and removed the protection.
‘We noticed a few things at stock and sector level and took the short back off. We realised the fiscal cliff negotiations would be concluded,’ he said.
Kilpatrick has exposure to the US through Alliance Trust North American Equity fund and Findlay Park American fund. He remains underweight the US and is awaiting the results of the debt ceiling negotiations.
‘We will see the US go to the brink, but the parties realise if they don’t do something, it will hit their reputations further,’ he said. ‘Markets will look through huff and puff to allow the debt ceiling to be increased.’
His Progressive fund has delivered 19.4% since the end of May 2010, compared to the FTSE World’s 18.1%.
Charles White (pictured above), an investment director at McInroy & Wood who manages its Income and Balanced funds with total assets of more than £480 million, said he was bullish across the board about the US despite debt ceiling uncertainty.
‘We still see significant opportunities in the US, particularly if you compare with markets closer to home where the potential for recovery is less dramatic and will take longer,’ he said.
He pointed to a stabilisation of the housing market, a greater dependency on domestic energy and a wide range of strong stocks as positives.
He holds 31% of the Balanced fund and 16% of the Income fund in US equities, with a particular focus on healthcare. He is considering also investing into US real estate investment trusts. The Balanced fund has returned 44.9% since 2008, while the LCI UK Balanced & Intl Equity (35:15:50) returned 22.9%.
‘There is an uptick in the housing market, which is key to making people feel richer and improving consumer confidence,’ said White. ‘New homes and this improving market could help to soften the impact of the payroll tax.’
He said the US political angle would occupy centre stage for everybody in the future, and he was still concerned about a market turn.
‘I wonder whether markets, having been frustrated by the last debt ceiling discussions and the political brinkmanship at the end of last year, will see through it and begin to discount it,’ he said. ‘It’s a worry: I just wonder how much that will creep in.’