By Andrew Hudson, director, head of North American equities at Isis Asset Management With the wo...
By Andrew Hudson, director, head of North American equities at Isis Asset Management
With the world on the brink of war, the problem facing the US economy is the lack of clear-cut projections about the outcome of conflict. This substantially increases uncertainty but shouldn't blind us to the fact that America's economy has inherent structural problems that won't ' and can't be expected to be ' overcome overnight.
Some solace is to be taken in the view that if war does start, it is likely to be short and sharp, but even so the US is in a period of limbo. We are unlikely to see the sort of finality achieved in victory in 1991, with the Korean issue and fears of terrorism likely to persist.
Oil prices should fall from current high levels on a resolution in Iraq but we feel that they are likely to remain above $25 because of a combination of low inventory, and constrained supply resulting from continuing problems in Venezuela. Overcapacity is also a problem in a large number of US industries, with many corporations now focused on using incremental cashflow to reduce debt rather than boosting capital spending.
While there is negative sentiment on consumer spending we feel that a period of weakness rather than collapse is to be expected. A factor contributing to recent poor consumer activity was the dismal weather much of the US endured last month.
Around the time President Bush made his speech on February 17 a third of all Wal-Mart stores were inaccessible because of freezing conditions in the north-east, leading to a dramatic drop in retail sales compared with the same time last year. The US consumer is likely to feel the pinch of higher oil prices and increased healthcare payments, but should sustain modest growth of spending in the absence of a sharp increase in unemployment. Real income growth has slowed and is unlikely to rebound in the near-term.
Any resolution in Iraq is likely to refocus attention on domestic growth and Bush's radical agenda to reshape the country's tax code. The White House estimates that the various tax cuts will add 0.6 of a percentage point to GDP growth in 2003, but the plan has critics on both sides of the house and is likely to face a difficult time in Congress.
The President's tactics show he is determined not to follow in the footsteps of his father who after winning the war is widely viewed as having lost the election because of a lack of economic growth at home. Whether he has the means available to avoid this outcome, however, is far from clear.
We adopt a style of taking a bottom-up approach to stock selection and what we are currently looking for are companies that can exhibit decent cashflow generation and are capable of producing sustainable growth. In recent months the fund's orientation has, for obvious reasons, been biased towards commodities.
Sectors we favour include paper, where demand-supply conditions remain favourable, and oil and natural gas where the overall pricing level is going to be higher in the next few years because of dwindling reserves and limited drilling potential.
Bush determined on stimulatory policies.
Demand-supply conditions favourable.
Modest growth is likely.
High oil prices likely to pinch consumers.
Overcapacity remains a problem.
Structural problems here to stay.
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