Threadneedle still believes in US economy resilience

Ahead of President Bush’s State of the Union Address, Cormac Weldon, Head of US Equities at Threadneedle Investments, comments:

We continue to be encouraged by the resilience of the US economy. Many market observers, Threadneedle included, assumed that the combination of high energy costs and inventory-build in the housing market would trigger a sharp deceleration of GDP growth in 2007. Yet the early indications are that, with employment and consumer confidence surprisingly strong, steady expansion of around 2.5 per cent can be expected for the year.

We remain aware that the brighter prognosis for the economy may be flattered by variables. Certainly, the warmer-than-expected winter in the US appears to have delayed the expected spike in housing related lay-offs. The 30 per cent slide in the price of crude oil since the summer has also been a fillip to the consumer. What is clearer, however, is that the housing slump is not leading to weakness elsewhere in the economy. We are currently seeing numerous jobs being created in unrelated areas such as the government sector, healthcare and financial services.

Equity market growth in 2007 is predicated to a high degree on interest rates not rising further. On balance we believe that slightly lower rates can be expected for the end of the year, especially given the likelihood of inflation remaining under control.

The next three months will bring more clarity as to the true medium-term outlook for the US economy. While we are turning more bullish on the overall landscape, we will in the meantime remain focused on companies that have the potential to thrive whatever the trajectory of GDP. Technology currently offers particularly attractive secular growth potential and we are favouring names like Apple and computer game console manufacturer Activision – companies in expanding markets with high quality products. Thematically, we have lowered our exposure to energy stocks given the mild winter.

Even if the economy does slow, we are confident of still being able to find companies with attractive earnings growth and high cashflow.