The importance of the USA on investment

First published in Business: Shares

THE stock market’s reaction to the re-election of Barack Obama as President of the United States was a firm thumbs down, with the third biggest one day fall in 2012, writes Anthony Platts.

For all his personal charisma that saw him reinstated for a full further four years, it is the policies that matter.

The presidential score in Obama’s favour was tight, although the vote on the House of Representatives was slightly less so, with the Republicans again securing more seats than the Democrats to retain the majority.

As often mentioned, the major thing that markets dislike is uncertainty. At one level, the presidential election did not have to resort to ‘hanging chads’ for a decision, which was a relief. The uncertainty arises on policy though.

The US Congress, through the Republicans, is firm that addressing the huge US debt level should not be via tax increases. The President is against reducing the deficit through welfare cuts. Something will have to give, otherwise the much talked about ‘fiscal cliff’ will be reached – seeing both aspects enforced.

Why should all this matter to a UK investor though?

Firstly, it is not unusual for an investor to have a significant asset allocation to US investments, either through direct US stocks or more commonly through US collective investments, of which unit trusts are the more familiar name.

Also, the US investment industry holds large stakes in UK listed companies. We still have world leading companies and the continued ability of US pension funds to invest in UK companies should be seen as a comforting factor in UK pension funds doing the same.

As an example, there are as many US investors in BP as there are UK investors. The largest holder of BP is JPMorgan Chase, on behalf of underlying investors, accounting for more than a quarter of the shares.

So the state of and prospects for the US stock market are indelibly linked to the state of and prospects for the UK market.

So the state of and prospects for the US stock market are indelibly linked to the state of and prospects for the UK market.

Taking another example of a great British company, Diageo. This is the company behind Guinness and many leading spirit drinks. Indeed, it owns four of the top 10 premium global brands and nine of the top 20. North America accounts for 41 per cent of operating profit in 2012. Contrast that to Europe, which in this case incorporates the UK, and the figure is only 27 per cent.

Investors in Diageo fortunate to have been invested since the UK market low point of March 2009 to date, would have seen the capital value of their holding increase by 144 per cent. Diageo is not a prolific dividend payer in terms of dividend yield, but add in dividend income payments and the return on investment jumps to 166 per cent in just over three and a half years.

Why should the shares of a company, whose products just happen to be so loved in the US, that only provides a current dividend yield of 2.7 per cent gross, rise so much? The reason is the amount that the dividend is increased by each year of ever growing profits.

In 2010, the increase was over 5.5 per cent, in 2011 over 6 per cent and in 2012 by almost 8 per cent. Brewin Dolphin is forecasting that the dividend will be increased by 9 per cent in 2013 and by 9 per cent again in 2014.

I hope the Obama supporters will be supporting with a nip of Britain’s finest!

Anthony Platts is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Divisional Director in the Teesside office of Brewin Dolphin, and can be contacted on 01642 608855.
Past performance is not a guide to future performance. The value of investments can fall and you may get back less than you invested. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.
The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.

 

 

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