The following is the latest interview With Francois Mouté the Fund Manager of ABN AMRO US. OPPORTUNITIES FUND published at ABN AMRO website on 03 MAR 2008. The original can be found at:
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Intermittent recoveries notwithstanding, the fundamental outlook for US equities looks set to remain gloomy for most of this year as the full extent of the damage caused by the sub-prime lending crisis has yet to be established, says François Mouté, the Paris-based manager of the ABN AMRO Funds – US Opportunities Fund.
"The present climate should support gold and commodities"
“The outlook for the US economy is clouded by the vulnerability of US consumer demand as a result of the housing-market slump. The problems are too serious to be eliminated in a matter of weeks or even quarters,” says Mouté.
That said, he expects the US economy to react favourably to the stimulus provided by the Federal Reserve’s robust action, including its 125 bps of interest-rates cuts in January, and the fiscal stimulus package adopted by the US Congress.
“The financial problems are huge, and the only way to solve them is to flood the market with money,” he says. “Hopefully, it is sufficient to avert a recession in the classical sense of the word.”
Looking at the longer-term outlook, Mouté expresses confidence in the US economy because of what he terms its “highly dynamic and flexible nature”. Another silver lining is provided by the dollar’s low exchange rate against other leading currencies, which appears to have sharply reduced the currency risk related to investing in dollar-denominated paper.
Selective approach to industry selection
As for industry and stock selection, Mouté is taking a highly selective approach. For the time being, he is avoiding industries and names squarely dependent on US domestic factors. Instead, he is focusing on stocks that stand to benefit from broader trends in the world economy, in particular emerging economies.
“US companies with international contracts that are positioned to benefit from strong global growth should continue to generate strong returns,’ he argues.
He is thus focusing on US oil exploration & production companies, some of whom derive about half of their profits from demand outside North America. A second focal point is basic materials companies that are profiting from strong Chinese and Indian demand for non-ferrous metals and fertilisers in particular.
Another attractive theme is building, machinery and engineering companies that are involved in the massive property-development activity taking place in parts of Asia and the Persian Gulf.
Mouté also favours North American gold mining companies. Although the gold price has nearly quadrupled over the past four years, Mouté believes it will move even higher.
“The present climate should support gold and commodities, even at the current elevated levels,” he says. “The fed funds rate currently stands at 3%, while the US consumer price index is at around 4%. That means we’ve effectively moved into negative interest-rate territory. Add to that the likelihood that the fed funds rate is cut further this year, and I would expect gold to move much higher.”
The outlook for US companies positioned to benefit from robust global growth—by the nature of their business and/or their own foreign operations—is further underpinned by the emerging economies’ growing independence of the US economic cycle, Mouté says.
But he warns that this so-called decoupling only goes so far. “It is important to distinguish between economies and stock markets. Even if Asia does well economically, Asian stock markets will go down if Wall Street goes down, perhaps even more so due to their greater volatility. But in terms of GDP growth, we do see that emerging economies are slowly becoming more autonomous,” he notes.
Looking ahead to the next cycle
While focusing on US stocks with an emerging-economy profile for the time being, Mouté is also cautiously looking ahead to the next investment cycle. “If the market turns out to be as weak as it could be, we might take advantage of that weakness by prudently taking some holdings of technology stocks,” he says. “But we are in no hurry to do so. We have some stocks on our radar screen, but it all depends on how the market develops,” he adds.
But he does not buy into suggestions that US financial stocks might have become bargains after the declines they have suffered. “I am not convinced,” he says. “The whole financial system is overly leveraged,” he cautions.
Mouté himself has taken full use of his licence to cap the equity exposure of the US Opportunities Fund at 60% of total invested assets. The cash reserves are invested in short-term transferable debt securities rather than US bonds.
“I think in long cycles,” says Mouté. “I believe that we have reached a point where bonds are an unattractive, if not dangerous, investment, as long-term interest rates are at historically low levels. The last time bonds yielded as little as they do now was in the early 1960s. That was followed by a period of rising interest rates and substantial losses for bond holders,” he concludes.
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Summary:
Oil +
Materials +
Industrials+
Gold +
Short-term Transferable Securities Debt +
Financial –
US Bonds –
Potential Target for Next Investment Cycle: Technology
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