British investors missing out on opportunities in US equities

ISA investors are shunning the US stock market, effectively ignoring almost half of the global equity market, says Fidelity International.

Despite a strong rally in US share prices – the Dow Jones Industrial Average has reached an all-time high – British savers are choosing to invest anywhere other than the world’s largest stock market, according to an analysis of data from the Investment Management Association.

Sales of North American funds accounted for just 0.63% of total gross ISA sales – just £5 million - in the month of April 2007, the peak of the ISA season. Five years ago, the sector accounted for 4.3% of gross ISA sales, with monthly contributions totalling £44 million.

A long-standing trend for UK investors to be under-exposed to the US stock market relative to its global importance has accelerated. At almost £15.8 billion, the North American funds sector accounts for 3.4% of total equity investment through mutual funds. Through ISAs the sum is just £534 million or 1.3% of the total.

Dollar rains on returns

One of the reasons why so many UK investors may be wary of the US stock market is the relative performance of North American funds. Over the five years to the end of March 2007, the sector delivered the lowest returns of any sector, including bonds. An investment of £1,000 over this period has grown to £1,037, less than the same stake in an instant access account which delivered £1,068.

The villain of the piece is the dollar. The exchange rate with sterling has slumped over the past five years, eating away at the returns for British savers. On 30th April 2002, $1 was equivalent to 69p. 5 years later it is only worth 50p – a decrease of nearly 40%. This has greatly eroded the value of any stock market gains for sterling-based investors. In own-currency terms, US equities have performed almost on par with UK equities with the Dow Jones Industrial Average and S&P 500 Composite returning 47% and 50% in dollar terms compared with 57% for the FTSE All Share in Sterling terms.

So is now the time to get into North American equities? Or with the markets again at, or near, their highs, are British investors right to stay away? Bob Haber, Manager of the Fidelity American Special Situations Fund, is cautiously optimistic about the mid-term outlook for the US. Concerns about the weakening housing market are offset by the number of American companies set to continue to benefit from global growth.

Bob Haber comments: “The housing sector of the economy is still a concern. Prices have now begun to fall in many areas and may well continue to do so, but data from the housing market is not uniformly poor and we have recently seen a pick-up in sales of new houses. This may be more to do with price cuts to clear inventory, but it does show that there is still an appetite for new housing. In addition, the US economy is proving to be resilient in the face of potential problems for the consumer.

“There are a number of companies which are continuing to benefit from global growth and I am finding opportunities in areas such as agricultural commodities. Here, demand is being driven by the 3 Fs: Food, Feed and Fuel. With the world population growing by around 50-70 million each year, the demand for food will continue. As this growing population starts to demand a high quality of food, so the demand for feed for cattle will also increase. Finally, this growing population, coupled with policy changes from governments is driving demand for alternative fuels. There are a large number of US companies well placed to benefit from these trends.”