ACCORDING to the late Sir John Templeton, investors should “buy when there’s blood in the streets”. The streets are not as bloody today as they were two years ago, but the last week has certainly been violent. Hints of a sovereign debt crisis in Europe, policy tightening in China, and the hangover from the announcement of a renewed quantitative easing policy have all depressed a lot of investors, and the S&P 500 fell by 2.75 per cent over the last week. Despite that, 66 per cent of S&P 500 companies outperformed expectations in the last quarter. Is now the moment to buy American?
Certainly some people think so. Bill Miller, chief investment officer at Legg Mason, thinks that despite the rally over the last year, American equities are still drastically undervalued. As he put it: “Stocks are cheap. They’ve gone down a lot and they are probably going to do very well”. Miller compares the current situation to 1974, when Warren Buffett claimed that equities were so cheap that he felt “like an oversexed guy in a harem”.
According to Miller, such is the pessimism still priced into the American stock market that even if American companies do not grow at all, the returns from dividend yield alone would still outperform bonds. And he estimates that far from not growing at all, the S&P 500 could increase by around 15 per cent over the next year as the economy picks up and retail investor confidence returns. Investing in US equities would seem very wise indeed then.
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Though others are less bullish, the mood is still optimistic. Manoj Ladwa, senior trader at ETX Capital, agrees that now could be a good time for investors to buy into America. He says that “the trend is positive as we slowly grind our way out of recession”, while this week’s price falls offer an opportunity to get in cheap. As Ladwa points out, American firms have built up impressive balance sheets, while earnings are very strong. As uncertainty recedes, firms may begin running those balances down by paying higher dividends – that in turn would flush the system with cash, bolstering any rally.
Moreover, as Ladwa observes, the weak dollar should make American equities particularly appealing to British investors, since it offers the chance to benefit from a strengthening dollar, as well as from rising share prices. With exchange-traded funds (ETFs), it is possible to hedge against currency risk or not. iShares for example offers ETFs linked to the S&P 500 index hedged against the pound, the euro, or not hedged at all. If American share prices continue rising, then eventually that might attract investors away from bonds and commodities – which would help boost the dollar. In that case, an unhedged ETF would seem a particularly wise way to invest.
Investors should perhaps be a little cautious, however. Liz Sonders, of Charles Schwab, argues that while the American economy is looking strong, American equities may be due further correction. Sonders observes that confidence is in fact especially strong right now – and that “when sentiment begins to show excess optimism, it often sets the stage for disappointment.” Sonders is not convinced that shares are especially expensive, but with fears about Europe’s sovereign debt persisting, the market may fall yet further. In that case, it might be wise to wait a little before investing with an ETF.
But for investors willing to hold out for the long run, now looks like a good time to get in. The fallout from the financial crisis cannot hobble the American economy forever, and growth must eventually return. When it does, we might well see a new bull market in American stocks. For investors who missed out on the 2009 massacre, this week’s bloody correction offers an excellent opportunity to jump in for the long term.