US stock market to post ‘decent' gains by year end as credit talk moves on

The US stock market will have put the credit crisis behind it to post ‘decent' gains by late 2008, according to Terry Ewing and Alison Porter, co-managers of Resolution Asset Management's £116m American Growth fund.

The duo, whose fund is 8th percentile in its sector over one year and 15th percentile over two years, believe that while credit markets may endure more bad news in the near term, the market is likely to have moved on by the end of the year, driven by an improved picture in credit markets and the positive impact of the Federal Reserve's interest rate cuts.

Porter and Ewing, who has just returned from the US, are currently overweight sectors including materials, healthcare and utilities. Key holdings in the materials sector - the managers' biggest overweight - include Bucyrus International, a mining equipment manufacturer, and Cleveland-Cliffs, North America's largest producer of iron ore pellets. In the utilities sector the managers are seeking to profit from massive electricity grid investment through maintenance company Quanta Services, while playing the renewable energy theme with a position in solar module manufacturer First Solar.

More domestically, the managers are cautious on sectors exposed to consumer spending - pointing out that the housing market is at its weakest since the Great Depression - and neutral on financials, fearing a repeat of 2002 when the TMT sector experienced several major bounces before bottoming.

However, they plan to gradually increase their financial weighting over the next two quarters - arguing the threat posed to the financial system by Bear Stearns has resulted in better borrowing arrangements for investment banks - while continuing to focus on global growth though internationally focussed companies such as Nike and McDonalds, and the safety of Wal-Mart.

Ewing says: "I have just returned from the US and my trip confirmed our view that the US stock market will be a mixed bag going forward. Consumers undoubtedly have major headwinds - namely the housing market, high fuel prices and rising unemployment - but there are lots of individual pockets of strength which present us with plenty of exciting investment opportunities.

"There does seem to be a more positive tone now and I believe the market will have made decent gains by the end of the year. I can't see talk of credit woes continuing past the US presidential election in November - the market will have got over it by then and moved on to something else."