Look to US for stock winners

Jan 28 2009 by Iain Laing, The Journal

AS RECENTLY as November, Gordon Brown insisted that Britain was 'better prepared' for the looming economic downturn than any of its rivals.

Many disagreed at the time and many more would disagree now. With the news last week that GDP dropped by 1.5% in the fourth quarter, the worst result since 1980, most analysts now believe that the downturn is set to be tougher and longer in the UK than across the Atlantic.

With that in mind, this week’s column asks whether it’s worth looking for FTSE stocks that make a significant amount of their profits in the US. Share prices have fallen across the board in the UK in recent weeks, partly on poor UK economic news.

But some companies in the FTSE make more than 50% of their sales State-side, which could give them a significant advantage over firms reliant on the struggling domestic economy. In addition, the plunge in the pound – from over $2 to around $1.35 – should be good news for the exchange rate on profits earned in the US.

Go west

We wrote a few weeks ago about why the outlook for the UK was gloomier than the US.

Nothing since then has helped us change our view.

Firstly, Britain is more exposed to the credit crunch than its rivals – debt-to-income ratios are higher here than in Europe or the US, for example.

Secondly, the housing market has further to fall and will probably ultimately fall further than the US.

And thirdly, the US government has been able to cut rates more and pump more money into the system than our own politicians.

Look out for healthcare

The new US government has promised to increase spending on areas including infrastructure, healthcare and renewable energy, so these are attractive areas, but a lot will depend on the detail of these plans.

In a market like this, more broadly, defensive cyclical stocks are the kind to look out for. They will see some benefit from a rising market, but keep plugging along if a recovery takes longer than expected. Here are a couple that stand out.

Healthcare is an obvious area, with Obama pledging to extend healthcare coverage to all Americans, at an annual cost of over $50bn. Shire is a specialty US pharma company incorporated in the US, with over 70% of its sales made there.

It’s an obvious choice, along with Smith & Nephew, GlaxoSmithKline and AstraZeneca, to benefit from higher healthcare spending. That said, much depends on how healthcare spending is specifically targeted, and we await more details.

Surprisingly, utility National Grid makes 58% of its sales in the US – it runs a large chunk of America’s electricity grid.

This puts it in a much stronger position than its regulated British peers.

Regulators’ revenues in the US are not linked to RPI as they are in the UK, which will soften the blow from deflation. And Obama’s push for infrastructure investment won’t harm the firm’s prospects either.

Timing is everything

We expect the US to begin its recovery later in 2009, and equity markets typically start rally several months before earnings hit the bottom of the barrel. But we are wary of false dawns.

Hard evidence of improving survey data will be needed to improve confidence in earnings outlooks before share prices really start to rally.

Andrew Miller is Newcastle office head of Barclays Wealth.