By Mohamed Ali Bernat Standard Life believes the soft landing in the US will not be hampered by oil ...
By Mohamed Ali Bernat
Standard Life believes the soft landing in the US will not be hampered by oil prices and is likely to be assisted by the presidential election, especially if the Republicans win.
Ken Foreman, investment director at Standard Life, said US oil stocks fell to 24-year lows after Opec's decision to boost production caused prices to retreat in July. This was followed by higher-than-expected demand that pushed oil prices back up.
Oil prices are the area of least certainty, according to Foreman, who feels they are too high but does not necessarily expect them to drop in the immediate future.
Renewed fighting in the Middle East increases the risk of supply being choked and the danger that high prices feeding through to petrol and heating costs has revived debate on whether this will lead to an inflationary cycle.
Foreman said he believes high oil prices will act as a dampener on the global economy, stifling real growth, but does not feel it should lead to inflationary pressures. He added: "If oil takes a bigger chunk of companies fixed costs it may affect their profits but there is plenty of oil out there and not much growth in demand which makes me feel the $30-40 price range is unsustainable."
The US market is still looking healthy, despite slowing from its rapid growth earlier this year, according to Foreman, who said US markets are paying particular attention to the presidential race as it enters its final phase.
He added: "The four-year presidential cycle has, historically, been one of the most reliable. In the past 35 years, election years have delivered above average gains, largely because the market never fell.
"Share prices have generally risen after a Republican victory and it is therefore not surprising that 73% of investment managers surveyed hope that Bush will win."
The S&P 500 is now priced at 24 times forecasted 2001 earnings due to surging profits, flat share prices and declining bond yields, according to Foreman, although he added he would like to see the multiple fall under 20 before he feels the market is cheap. He said: "One should also remember that reported earnings are a bit more rose-tinted than they would have been 10 years ago.
"For a start, companies are increasingly using stock options to pay their staff, which does not come through in their earnings reports but eventually comes home to roost when shareholder value is diluted."
Foreman said he believed analysts should attach a lower P/E to the earnings of companies paying in that way and added that changes in accounting rules had also relaxed the reporting of profits.
Mergers and acquisition activity is still strong in the US, with technology companies using their high paper values to fund takeovers and old economy stocks seeking to improve margins through consolidation.
"Some companies seem to live by taking over others, with Cisco Systems a prime example. To some extent it has been successful but if you dig behind the business plan you find it has perhaps not been as successful as they are proclaiming," he said.
Another factor keeping the US market buoyant is that foreign companies have also been active in acquiring US firms, with slowing growth in overseas economies indicating the trend is set to continue.
Foreman said the process was slowing but added: "There are some negatives with that trend because it can result in so much capital flowing in that value is diluted in a saturated market and returns fall."
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