Asset managers sound warning note on US stocks

Aberdeen Asset Management and Janus Capital express caution over the outlook for the US market, with the high level of unemployment a major area of concern.

US consumer-related stocks have fallen significantly in the past month, and employment levels must rise for consumption growth to pick up, argue fund managers.

Although unemployment figures fell slightly in June, the US economy cannot sustain its current momentum without a strong rebound in employment, says Aberdeen Asset Management in a report released last week.

Moreover, Aberdeen points out that the unemployment figures do not include those classified as “discouraged workers” by the US Department of Labor -- that is, they are unemployed but are not looking for work because they believe they have no job prospects.

The number of discouraged workers has risen at an “alarming rate” since the current recession began in December 2007, says the report. Adding the 1.2 million discouraged workers noted in the June report would result in an increase in the unemployment rate to more than 10%, says Aberdeen.

The “stubbornly high unemployment rate” is likely to restrain the expansion of domestic consumption for a while. Having said that, US equities have in fact performed well in 2010 versus their global counterparts, as many companies reduced their payrolls dramatically when the economy slowed in late 2008 and have been “quite creative” in running with leaner workforces, adds the firm.

This is perhaps the key reason why many US companies have shown strong cost reduction-led earnings rebounds over the past 12 months -- frequently exceeding the market’s more conservative expectations -- without yet seeing significant increases in revenues, says Aberdeen.

This “positive operating leverage” will generally continue into early next year, although Aberdeen says “multiple headwinds” remain in the market.

US-based Janus Capital makes a similar point in a recent report, but adds a positive note.

“Though typically a lagging indicator, the US labour market has been slow to turn around,” says the asset manager. “We continue to believe unemployment will remain high, which could serve to dampen consumer confidence and spending. Private payroll growth is an area worth watching.”

The number of workers trying to enter or re-enter the labour force may be larger than many anticipate, adds Janus, and the surplus of labour is likely to keep wages under control. Though not a positive for boosting marginal consumption, this situation could help resolve certain economic imbalances, such as making manufacturing in the US more competitive on a global scale, says the firm.

Still, Janus remains cautious in general in terms of outlook. “We are encouraged by the overall strength in corporate America, but believe there is a greater likelihood of muted or uneven economic growth,” says the firm.

Meanwhile, improvement in the consumer-related sectors may ultimately prove to be a boon to other industries, with transportation-related stocks an area that should benefit, says Aberdeen.

“While the US rail system is not as good at hauling people as other developed countries, it is actually quite efficient at hauling goods, including coal, industrial parts and consumer products,” says the UK firm. “Most of the larger rail companies in the US are well-run, efficient organisations that compete in markets with significant barriers to entry.

“And considering transportation costs are such a small component of the total cost of most goods,” adds Aberdeen, “we believe rail companies in general will maintain pricing power, especially as utilisation continues to improve.”

The manager says it has exposure to the industry in all its major US investment portfolios.

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