As US economic growth slows, the best prospects for investors will be in pharmaceutical and consumer...
As US economic growth slows, the best prospects for investors will be in pharmaceutical and consumer staples, according to Simon Laing, manager of the Newton American fund.
Laing says: "We are overweight pharmaceutical companies as they will not be impacted by a US slowdown. If consumers start feeling the pinch of higher interest rates at 5.25% it is unlikely they will stop spending on medicines. They will stop spending money in the retail sector instead."
One example in Laing's portfolio is drug company Wyeth, which saw its profits increase by 9% to $5.2bn for the second half of 2006. He explains the group's anti-depressant drug Effexor has seen sales increase by 6%. It also has received approval by the US Food and Drug Administration (FDA) to develop another pharmaceutical product for depression called desvenlafaxine (DVS-233) for 2007.
Nick Skiming, investment manager of the American fund at Ashburton, is also taking a cautious stance and has invested in the healthcare sector. He likes pharmaceutical store CVS which he says is the US version of Boots and has acquired a large number of retail outlets. The company has added around 1,800 stores to its business, which will increase both its market share and profits.
Another stock in the Ashburton portfolio is Merck. He says: "The company has been setting up its own generic laboratories to produce its own drugs at cheaper prices when they come off patent so other companies can not undercut them."
However, Laing also believes the pending slowdown presents buying opportunities for investors especially among building and construction stocks. "Although there are signs that cracks are appearing in the housing market, housebuilders are trading on cheap valuations.
Housebuilding stocks have been hard hit for the past 15 months, with some falling by as much as 60%. As they are trading at book value the downside risk is minimal," he says.
Another area, which Newton and Ashburton both have a bias toward consumer staples. Their rationale is that this sector will not be impacted by a US slowdown.
Laing holds Procter & Gamble in his portfolio because it is benefiting from sales in its Gillette shaving range. The group has just announced the opening of a Gillette manufacturing operation in Poland, which should cut costs, and has launched a new Fusion razer range.
However, Skiming has recently sold his stake in Proctor & Gamble. "Although the outlook for the company looks good, most of the profits are already in the price of the stock, he said. There are now so many investors who have put money into this company it is unlikely to go any higher for the short term. Now is the time to take profits."
Snack group Pepsico is another consumer staple stock in the Ashburton portfolio. Skiming likes this company because its international business has been doing well and there has been an increase in snack food sales in the emerging markets such as China and India.
For example, the Lays Crisps line has been tailor-made to suit the tastes of the market and it has introduced flavours like Paprika crisps.
Laing is also overweight insurance. He says these stocks are trading at a discount because of the hurricane season, which caused much devastation along the US coast last year. key points
US economy is set to slowdown
Defensive stocks should perform well
Pharmaceutical and consumer staples sectors to outperform
Warns on profits
Hargreave Hale seeking legal advice
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First mentioned in Cridland Report