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US Independence Day – Should investors buy into the American Dream?

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·         US valuations are at their long term average

·         US economy accounts for 19% of World GDP

·         HL analysis shows only 3 out of 77 large cap US funds beat their benchmark

Adrian Lowcock, Senior Investment Manager of Hargreaves Lansdown, looks at the prospects for the US economy on the eve of Independence Day;

“The US economy is much further down the road to recovery than the UK and Europe.  The banking system has been fixed and the country does not have the problems that still exist in Europe. We can see the light at the end of the tunnel in the US and sustainable growth may be achievable.

“Many US companies benefit from strong management teams, are profitable businesses and operate in an environment of improving growth.  Many American companies have a consistent and long term track record of being able to grow profits. In the world of uncertainty a premium is being attached to those businesses that can continue to grow.

“Whilst overall the US stockmarket is not cheap, there are still areas which offer value and investors get access to companies with huge growth potential.  The US has a long history of encouraging entrepreneurs to develop and grow business.  The US has a large smaller companies sector which is full of businesses looking to grow into global leaders. Investors should make sure they have some investment in the US Market within their portfolio.”

US Economy

The US Economy accounts for 19% or nearly 1/5th of the world’s gross domestic product.  Economic outlook in the US is improving with GDP growth forecast by the IMF at 1.9% for 2013 and 3% in 2014.  The threat of a “fiscal cliff” was largely delayed; bank lending conditions have improved from low levels.

 

Household debt as proportion of disposable income has fallen back to 2004 levels. House prices started to rise in 2012 and investment in residential property has followed.

 

Unemployment is falling with major banks* predicting the unemployment rate will be around 7% by the end of 2013.

 

Rising house prices should help rebuild household finances, as will improving employment, providing support to personal consumption.  Low borrowing rates should be supportive of increased spending, while businesses encouraged by the improving financial conditions and healthy profits may well increase investment.

 

Shale gas could be transformative for the US economy.  According to the U.S. Energy Information Administration it will keep market gas prices low at around $4 per million Btu until 2019 with prices rising slowly thereafter. This could rejuvenate the industrial sector.

 

Risks to US Recovery

 

The biggest risk is the early withdrawal of the Quantitative Easing programme.  As the economic data, such as unemployment falling below 7%, improves it puts pressure for the Federal Reserve to roll back on further QE. The US has not addressed its budget deficit and the US lacks a plan to reduce the debt. As such there are risks of further political entanglements over raising the debt ceiling, both of which result in a higher sovereign risk premium.

 

Investing in the US

 

The US stock market has performed well in recent years recovering from the financial crisis having returned 103% since March 2009 compared to the FTSE 100 and the FTSE Europe Ex UK returning 80% and 62% respectively. The US stock market is around its long term average valuation with a P/E at 21.98 compared to its long term average of 23.8 times earnings. Even so there are areas of the US Market that remain attractive.

 

The challenge for investors is how to access the US market. Analysis by Hargreaves Lansdown shows that large cap active managers continue to struggle in the region with only 3 out of 77 funds in the IMA North American sector out-performing the S&P 500 over 3 years and 6 out 68 able to do so over a 5 five year period.

 

Investors looking for large cap exposure should consider US tracker funds, , such as HBSC American Index or I-Shares S&P 500, to give access to the world’s largest stock market whilst keeping fees low. For those wishing to access US smaller companies our preferred fund is Legg Mason US Smaller Companies.

 

* Bank of Tokyo-Mitsubishi, Barclays, Citigroup, Deutsche Bank and UBS


Three Arrested Over PS3 Hacks – Cyber Group 'Anonymous' Blamed

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Spanish police announced yesterday that they had captured three people suspected of hacking in connection with the recent attacks against Sony’s PlayStation Network, as well as government and corporate websites around the world.

One man, based in the city of Gijón, allegedly had a computer used to attack PSN as well as Spanish banks and other corporate companies. The other two arrests took place in Valencia and Barcelona, but as yet, no further information has been given.

If Spain’s National Police are to be believed, the arrests were made as part of an investigation that began last October after the Ministry of Culture website was hacked, and that the offenders were traced by incriminating chat logs and web pages.

According to sources, the three suspects were part of the hacking group ‘Anonymous’. The group previously denied any official involvement with the PSN hack, although a police statement suggests Anonymous continues to ‘hold a vast membership of people from various countries around the world, organised into ‘cells’ that share common goals’.

An unnamed source said:  ‘These hackers are activists operating anonymously, but in a coordinated fashion. Commonly referred to as ‘hactivists’, this group of hackers has been cyber-attacking networks and websites around the globe and then gleefully advertising their successes.”

If these are true, and let’s be honest, it is not entirely unfeasible, attacks on corporate companies are likely to be a more of a regular occurrence in the future.

Stay tuned to Frost for more information as it happens…