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Dubai: Visitors to our planet might be shocked that the US equity market accounts for around 40 per cent of globalised equities, (given that the first newspapers they read will be splattered with headlines about poor US economic data and an ailing currency).
Still around twice the size of the second biggest equity market, visitors might wonder whether these negative headlines are part of a permanent ongoing decay or just a short-term blip.
It's not just visitors who are concerned, so for an insight I spoke with Nick Skiming, fund manager of Ashburton's Americas Equity Fund, and to whom the US market is "unloved but ready for a rebound".
When once US equities accounted for more than 50 per cent of all global equities, it was everybody's darling. Some of the best managed companies in the world: home of the world's biggest brands, and still, according to some reports, the most appealing place in the world to run a business. As everybody's darling, it would feature in every global portfolio. Recently, the darling has lost appeal with Asian, emerging markets, private equity and other distractions on the "catwalks" of the global portfolio managers.
So, why is Skiming looking at the "old model"? "The fact is that the US is looking extremely interesting, relatively," says Skiming, "Europe is slowing; China and India will remain turbulent and prone to bumps and bruises from rising energy costs, whilst the rest of the emerging markets will also be hampered by rising energy and agriflation."
Good fundamentals
In this context Skiming sees the US as "ahead in its economic cycle with well established companies which should not be ignored". More importantly, the fundamentals are looking good with "the S&P trading on a 14.4 income multiple". Bottom line a high quality cheap market.
Yet Skiming isn't the only one attracted to old models. "Research consensus tells us that earnings growth across the S&P will be at around 7 per cent". Interestingly, he also points out Brown Brothers Harriman (BBH) research indicating that earnings (less the financial sector) were up around 11 per cent. Whilst it's difficult to ignore a train smash, the point Skiming makes is that the smash was on one line and didn't affect other lines of money making to the same degree. BHH suggest that the financial sector earnings (haunted by Bear Sterns disappearance and credit woes) plunged a staggering 88 per cent. Look past the smash if you can-seems to be the message.
For Ashburton then, US stocks are underpriced and under-loved. Testament to the latter comes from indicators showing: US domestic investors are increasing their purchases of international stocks, plus, international investors are not queuing up like they used to for US stocks. How much of this is related to the US currency? I asked. Although markets are taking a "one way bet against the dollar" in the short term, Skiming' takes the view that the US currency will actually strengthen. The suggestion then is a double whammy opportunity: cheap equities (at five year lows) set to rise along with an appreciating currency. Note, however, the emphasis on "short term currency strengthening".
Ashburton's Americas Fund is actually a pan-American offering although 76 per cent of the current holding is US-oriented. It is managed on an active stock picking basis which provides us with the opportunity to ask Skimings to pick three "tips". First up is: Bucyrus. Bucyrus is described as a coal mining equipment company, but Skiming's prefers to call them a "natural resources" company. Boasting a 30 per cent plus CAGR, a key attraction is the fact that something like 60 to 70 per cent of their revenue comes from maintaining high value equipment. Further, their growth is not dependent on US growth as "by 2010 around 50 per cent of their revenues will be from high growth emerging markets" says Skimings.
The second company is: SPX Corporation. This is a mid-cap company specialising in infrastructure. As with Bucyrus, a critical attraction is the ability and intention of the company to take US interests, technology and management skills into the global arena. It's principal area of targeting at present are the world's power stations. SPX currently supply up to 12 per cent of equipment for new power stations.
The final tip is a fertilizer company: Potash Corporation. Apparently the company is the leading supplier of potash with access to the biggest supply of untapped reserves. With the current price at $750, Skiming's sets his sights on prices reaching $1,000. A key engine towards this price and beyond would be the possibility of re-negotiations with China for more potash at a higher price later this year.
It has to be said: good tips, or all fertilizer? Time will tell and a following of the Ashburton Americas Fund will be a way of tracking these choices..
- The writer is chairman of Mondial Financial Partners.
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