In this exclusive article Tom Walker, manager of the Martin Currie North American Fund, shares his current views on the US market. This is the original, unedited version and should not be seen as a personal recommendation to invest or make any changes to your portfolio. Please note that Hargreaves Lansdown and Martin Currie do not necessarily share his views.
Henry Kissinger once observed that 'no great power retreats for ever'.
Since the dotcom bubble burst back in 2000, US stocks have massively underperformed their global peers. Over the same period, the dollar has declined sharply, further eroding returns on US investments.
But keep Dr Kissinger's comments in mind: after almost eight years of disappointment, it seems the long retreat of the world's largest economy and the underperformance of its most diverse stockmarket is drawing to an end.
Heading into 2008, the US dollar was charting a series of record lows against the euro. As it did, we predicted to our clients that the greenback's painful - and rapid - decline would come to an abrupt end this year. That prediction may have come a few months too early, but it was correct.
As this year has progressed, it has become apparent that backing the dollar to fall is no longer a one-way bet: commodity-backed currencies and the euro have, as predicted, started to weaken. And while foreign exchange markets have not been immune to the volatility afflicting most financial markets, the underlying trend has been clear: against a basket of currencies, the dollar has rallied by almost eight percent from its March low.
"On aggregate, US stocks currently trade on less than 13 times prospective earnings - that is, historically, very cheap."
And, as the dollar has rallied, US share prices have started to reverse their long trend of underperformance relative to other developed markets. The gains are, to date, modest, but they're a start. Because other developed economies are just starting to catch up with what we have already seen in the US, we think there is more outperformance to come.
Given the tone of recent newsflow, that belief may seem surprising. We are optimistic, however, that if the US is in a recession (and that is, still, an 'if') it will be short and shallow. More importantly, the US is an attractive defensive option: the negative news on slowing growth and asset writedowns is being factored in by the market. On aggregate, US stocks currently trade on less than 13 times prospective earnings - that is, historically, very cheap.
Furthermore, while growth in the developed world is slowing, we do not subscribe to the view that the growth story in Asian and emerging economies is over; the sharp falls in the Chinese market reflect a tightening in liquidity rather than any material deterioration in the country's growth prospects. Powered by the strength of emerging markets, the global economy will continue growing - slowly this year, but more rapidly as we head into 2009.
That growth, coupled with modest valuations, presents us with opportunities. As investors start to look forward and focus on corporate profits again, I hope that they will start to see the American market as I see it: not as a homogenous entity scarred by sub-prime and the problems of the banking sector, but as a vast pool teeming with pockets of profitable entrepreneurial life.
When we look into that pool, what really excites us is both the quantity and the diversity of first-rate global growth stocks it contains, many of which can be bought more cheaply than at almost any time in the last twenty years. And, as 2009 progresses, we believe that Dr Kissinger's dictum will be borne out by the US market: no great power retreats for ever.
