Finding somewhere to put your money this year is proving to be far more challenging than it has been for some time.
The top pick of recent years, commercial property, has turned into an investment nightmare, while it looks rather late to get into the latest big story, the boom in emerging markets. “Trading on nearly 30 times expected earnings, India looks pricey and China is a bubble waiting to burst”, says Tom Stevenson in The Daily Telegraph.
So where should you turn? It might seem a little odd, but a growing number of commentators are suggesting America as this year’s smart buy.
Both Credit Suisse and HSBC have recently advised that fund managers should be ‘overweight’ in US stocks compared with other global equities. And election years are usually good news for American stocks. “Historically, investors have profited from the US market when the race for the White House is on,” says Ben Yearsley of Hargreaves Lansdown in The Sunday Telegraph, rising 9.6% on average.
And although it might sound unlikely, “stocks look interesting”, adds Bob Doll, BlackRock’s chief investment officer for equities, in his ten predictions for 2008. He reckons stocks – trading on a p/e of 16.7 – are cheap relative to other asset classes; bonds and housing are on p/e ratios of 22.8 times and 24.8 times respectively, he tells Forbes. For those who are equally bullish, Yearsley likes the Martin Currie North American and M&G American funds.
But we’re not so sure. Certainly, we wouldn’t be surprised to see the dollar continue to strengthen against the pound – partly because the dollar has fallen so far, and partly because sterling is so detested at the moment – and that could be good for those who have dollar-denominated investments.
But no matter how cheap they’ve become, US stocks could still get a lot cheaper. Banks are still posting larger-than-expected subprime writedowns (see page six for more), while US stocks have fallen for three straight weeks, posting their worst start to the year since 1991 as fears spread that the economy is contracting. “All signs point to a recession,” Nauman Barakat, senior vice-president at Macquarie Futures USA tells Reuters.
And the main reason that Credit Suisse and HSBC have become more upbeat on US stocks is that they expect the Federal Reserve to slash interest rates further – which, of course, will only happen if economic conditions become weaker. In short, election year or not, we’d give US funds a miss for now.