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Despite recent signs of improvement, the long-term outlook for the US economy looks bleak
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While Wall Street remains uncertain over the future, investment opportunities can be found
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Newton's Laing sees possibilities within the US healthcare sector in those companies involved in the reduction of healthcare inefficiency and costs
"US equity investors are navigating treacherous conditions," says Laing. "Short-term economic developments are clashing with longer-term structural trends, and the heavy handed manipulation of bond and currency markets by the US Federal Reserve (Fed) is having repercussions across every asset class," he adds.
"The business of economic prediction is a tough one. In the short term, US economic data has improved markedly. The ISM survey, a reliable leading indicator, has been in expansionary territory for 23 months. The US is finally adding jobs too, and we believe that US corporate profits are likely to reach an all-time high in 2011. However, given the Fed's persistence with expansive monetary policy, perhaps such short-term strength should not be all that surprising," says Laing.
"Despite this seemingly positive news, the longer-term picture is becoming bleaker. Federal and state budget deficits need to be addressed, and politicians' fiscal austerity rhetoric has reached a crescendo over the last two months with the US hitting its debt ceiling," he explains. "The overall debt level is approaching 100% of GDP, and the ‘off-balance sheet' liabilities of retiree pensions and healthcare are further mammoth issues yet to be addressed."
Picking the winners
"With these contrasting factors at play, pity the economist tasked with the job of predicting where US economic activity is heading. The history books are of little help because we are in uncharted territory given the extent of the global policy response. The result is a massive dispersion in economic forecasts for 2012," says Laing. "According to Bloomberg, Wall Street economists can't decide if growth will be strong - GDP estimates vary from 2% to 5%; whether monetary policy is inflationary or not - CPI estimates vary from 0.9% to 5%; or if the US will add or lose jobs - unemployment rate forecasts range from 6% to 9%.
"In short, Wall Street doesn't appear to have a clue; however, there are long-term trends that cut through all this noise. These can help identify attractive investments even when the outlook is opaque, as well as helping to avoid potential pitfalls," he explains. "Such an example is demographics. The changing nature of populations can be analysed and is not subject to the vagaries of the economic cycle. For the US, the impact of the US baby-boomer generation moving into retirement will be profound. We will be looking to task ourselves with finding companies that are well set up to cope with the changing demand profile for products and services that will be affected by this," Laing adds.
In sickness and in health...
"One area of the market which intrigues us is the healthcare sector. The long-term global demand outlook for medicine and medical technology is very strong; however, the investment opportunities are very different for a US investor compared to those of investors in other regions," he says.
"History shows that as GDP per capita in a country increases, healthcare spending per capita rises exponentially. We believe that this presents a significant opportunity for companies exposed to growth in emerging markets, but poses a risk to their US counterparts. Indeed, the US already spends 18% of GDP on healthcare, well above other Western countries. Meanwhile, 23% of the 2010 US budget went to fund Medicare, the retiree healthcare insurance plan, and Medicaid, the healthcare plan for those on low incomes. Current forecasts suggest Medicare will be insolvent by 2024, highlighting the US healthcare cost problem. Clearly the current trajectory of healthcare spending is unsustainable and we need to exercise caution in investing in companies that represent the cause of this problem. However, we believe that there are certainly investment opportunities to be found in those companies that are the solution to the problem," Laing explains.
"More specifically, we like those companies involved in the reduction of healthcare costs for consumers and employees, helping to increase the availability of generic alternatives to more expensive branded drugs by delivering through more profitable channels such as mail order. Elsewhere," he concludes, "healthcare IT systems are remarkably poor, so there are opportunities on both the software and service sides to take advantage of the need for greater efficiency in the health system in the form of electronic health records and information sharing."
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