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Ignis' Ewing: our best US investment ideas

Ignis' Ewing: our best US investment ideas

As concern about the US fiscal cliff grows, Ignis US equity head Terry Ewing discusses the best way to exploit the investment opportunities in the world's biggest economy.

In an article for Wealth Manager, he discusses whether the fundamentals are sufficient to propel the market higher after two excpetional years.

Ewing writes:

Supportive economic backdrop?

US headlines continue to be dominated by the threat of the ‘fiscal cliff’; reduced spending and higher tax proposals due to come into effect in 2013 in an attempt to cut the US budget deficit. We believe investors should not obsess with the ‘fiscal cliff’ and that an orderly solution will be found.

While implementation of the proposals will hold markets back, we still envisage a 2% to 2.5% growth rate in 2013 with a notable improvement in the second half of the year.

This remains ahead of forecasts for the UK and Europe and means the US has a better chance of growing its way out of fiscal debt problems. This outlook comes with the caveat that events in Europe could be detrimental and that the Chinese economy needs to be managed correctly or risk hitting profits of US-listed companies.

US macroeconomic data has recently demonstrated improving economic momentum. The Federal Reserve’s policy of guaranteeing a low Federal Funds rate through mid-2015 seems to be fulfilling its aim of reducing unemployment.

Data shows manufacturing activity is improving, and retail and auto sales trends are encouraging. Vital housing market statistics have also been positive with prices and transaction volumes following an improving trend.

Corporate strength

On the corporate side, there has been a heightened focus on a resolution of the ‘fiscal cliff’ and future tax policy. However, positives such as the incredibly low cost of debt which many companies are currently taking advantage of, creates flexibility around future uses of capital.

Companies are also benefiting from strong balance sheets and the highest level of free cash flow in the history of the US. Against this backdrop, we are positive on the outlook for 2013 and have a strong pool of investment ideas.

Current themes and opportunities

Banks have restructured and refinanced and this is now an area of opportunity. In the same way as US consumers have reduced their debt load by more than any other country, so US banks have reduced debt and rebuilt their capital base.

This now puts them in a position to be able to begin to expand their balance sheets, with commercial and industrial loans increasing significantly. Banking stocks we currently like include Bank of America, Citigroup and Signature Bank.

Housing is very much on the path to recovery following its painful crash. Data around the sector has been unequivocally good and a housing market recovery has positive knock-on effects across the wider economy.

As housing starts pick up from current levels there is the potential for 2million jobs to be created over the next two years. Apartment vacancy rates are currently at a record low and it is now cheaper to buy than to rent. At this early stage in the recovery there are certain stocks that will benefit more than others and we favour Lowes, Lennar and SunTrust.

Oil and gas in the US has just begun a multi-year boom period. Historically the energy supply has been reliant on overseas’ production and there is a marked shift to becoming more self-sufficient. New technology could result in the US becoming the world’s number one gas producer by 2015, and the biggest oil producer by 2017.

This provides both an economic boost, with around 1million jobs being created, and also impacts foreign policy due to a reduced reliance on oil-rich countries. Stocks we currently like include Kinder Morgan Pipelines, Dover Industries and Lyondell Basell.   

A manufacturing renaissance is currently taking place. The US underwent a prolonged period in which imports increased and that trend is now reversing.

Companies are finding it more cost effective to produce goods at home rather than import, and this is forecast to create 2-3million US jobs in the next decade. This shift away from imports has been accompanied by a rise in the amount of goods exported from the US. Stocks we hold related to this theme include United Rentals, Union Pacific and Canadian Pacific.

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