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Down, but not out

America is still the best place in the world to invest

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Depending on who's making the stump speech during this year's presidential election campaign in the United States, our big brother to the south is either in decline or in recovery.

The Republicans claim the love of their life -- America -- is sliding further into decline as Democratic policies push it deeper into debt.

The Democrats claim the United States is recovering, but that takes time because the Republicans left it in a mess before getting evicted.

If you ask AGF American Growth Class Fund manager Tony Genua, who has about three decades of market-watching under his belt, there's a bit of truth to both of those arguments.

Genua was in Winnipeg this past week to promote AGF funds, and he spoke with the Free Press about the state of our closest neighbour.

The thing is that despite the many predictions the United States is a crumbling empire, it's still got a lot going for it from an investor's perspective.

"The economy is definitely not as healthy as it could be," says the Toronto-based manager.

"But it's stabilized and not deteriorating and you can't say that about Europe or even emerging markets."

The S&P 500 -- a broad measure of U.S. corporate health -- has a year-to-date return of about 18 per cent. By comparison, the S&P TSX composite has increased by about two per cent.

But its markets have done more than ours. They've even outpaced emerging markets so far this year.

After years of bad news, U.S. equities appear to have a lot of upside -- both short- and long-term.

Indeed, there should be, Genua says.

Historically, the United States has done well after long periods of poor returns such as the 10-year-plus stretch we've just seen.

But the actions of the Federal Reserve, which has taken unprecedented steps to bolster the economy, also spell an increase in stock prices. The Fed recently announced its latest quantitative easing -- QE3.

Arguably, its actions are the main reasons for the recent boost in prices of the Dow Jones industrial average and other U.S. indices. It's also why near-term expectations are bullish among market-watchers.

"I think if the Federal Reserve hadn't implemented its third round of quantitative easing, the market would have been disappointed and gone down," Genua says.

It's hard to deny underlying weakness in the economy. The United States is still recovering from the collapse of both its housing market and banking sector almost exactly four years ago.

But unlike Europe's central bank, which needs consensus to act, America's Federal Reserve can act quickly and unilaterally to inflate the economy. It is printing money and that drives fiscal conservatives crazy because it devalues the dollar. Yet, despite unprecedented increases in the money supply, the United States has remained the world's reserve currency.

Even though the Fed is buying up about $40 billion a month of mortgage-backed securities and other treasuries to keep interest rates low to encourage borrowing and keep the economy afloat, Genua says the United States remains the world's best place to invest.

Still, it's by no means a risk-free venture. By keeping rates low, the Fed wants consumers and business to borrow and spend money. But it's debatable whether the U.S. consumer is feeling all that financially frisky these days.

"To what extent the impact of QE3 will be felt in the real economy, we'll have to see because we didn't see too much after QE1 and QE2 in terms of economic activity," Genua says. "There's a tremendous amount of debt in the U.S. -- not only at the federal, state and local levels, but consumer debt is also high."

Still, when the government buys up its own bonds, effectively putting more money into the system, the cash has a tendency to flow into the stock market in the short term. Over the long term, loose monetary policy has historically led to inflation. That, too, bodes well for stocks.

Another plus for investors is many major U.S. corporations are in peak financial condition, even though their main buyer -- the U.S. consumer -- is hurting.

"It (corporate America) has almost $2 trillion of cash balances," Genua says.

But companies are reluctant to spend because consumers in just about every part of the world are reticent to do the same.

Even so, the stock market in the United States has continued to climb, in part because corporations have been buying up their own stock.

"If you look at American behaviour, U.S. equity funds have been in redemption year-to-date, so the biggest buyers of U.S. equities have actually been corporations themselves as they've bought back their own stock."

Year-to-date, they've bought collectively $226 billion of their own stock compared to equity funds and retail investors buying about $40 billion, Genua says.

All these factors lead to a nice upside for the U.S. stock market, but some stocks are going to be better long-term buys than others.

These are those firms that have led the world in innovation, and they hold the key to the United States climbing out of its economic rut.

"The U.S. is still very competitive on the world stage because of its innovation."

Few other nations produce consumer technology like the United States does. Most of the world's top tech firms are American: Apple, IBM, Google, Cisco, etc. While they often produce their gear on foreign shores, their brains are what should tantalize investors.

"My main preference is looking at leaders in every cycle, and the principle driver is innovation," says Genua, adding his fund's largest holding is Apple.

Sure, Apple's stock price is expensive, but he says it's got 20 per cent of its valuation in cash. The recent iPhone 5 release will certainly add to its pile of moolah. And tech firms need money -- lots of it -- to thrive because it fuels research and development in the race to rapidly produce new gadgets to amaze and entice the consumer.

Those other U.S. giants such as Walmart will do well, too, but they often find North American shores friendlier than overseas, Genua says.

"The bricks-and-mortar model hasn't translated the best going into overseas markets," he says, adding Walmart has a tough go of it establishing beachheads in places such as Germany. "But when it comes to retail that involves technology, like Amazon, the model is very good and does travel across borders."

Genua says he hunts for companies with long-term growth prospects, and he's less inclined to invest in firms that benefit from cyclical growth, such as automakers.

Still, even the Big Three have a lot colour in their cheeks these days.

"I was in Detroit recently," he says, adding few U.S. cities have felt the effects of a flagging economy more than the Motor City.

Heck, for awhile, Detroit was making headlines for entire neighbourhoods being abandoned and reclaimed by nature.

"It's certainly not booming, but it's lifting off the bottom," he says. "We're seeing some car dealerships opening across the U.S, so it looks like car production is on the upswing and that's a good sign of health overall for the U.S."

giganticsmile@gmail.com

Don't blame the homeowner; it's the neighbourhood

AGF's American Growth Class fund's performance over the last 10 years hasn't been very impressive. Even its manager, Tony Genua, admits that. He's been at the helm since April 2005. Since then, it's not had by any means a stellar run, either. "If you were to look at the portfolio vis-a-vis other funds in the category since that time, would you see a lot of progress? No you wouldn't," he says about comparing it to emerging markets or precious metals. "But what you will see is it's one of the best houses in a poor neighbourhood." In other words, it hasn't done poorly for a fund that invests in the United States. Morningstar Canada rates the fund three stars out of five. And its year-to-date return is between 14 and 15 per cent (as of Sept. 17) after a management fee of 2.99 per cent, which Genua says will soon decrease to 2.7 per cent.

Think markets want Mitt to win? Think again

While Republican candidate Mitt Romney certainly fits the mould of Wall Street insider, the stock market generally does well when the incumbent wins, Genua says. "It doesn't have to do so much with the policies of the Democrats or the Republicans." It's more a reflection of the economy. So while there's eight per cent unemployment and lagging consumer demand, if Obama wins, the economy can't be all that bad. "Sure, the economy is not great. Maybe it's satisfactory, so it will be a tight race." Still, Wall Street largely would prefer to see Romney win. "By and large Wall Street prefers Republicans because it likes their policies," he says. "It wants less regulation and lower taxes." But as history has demonstrated over the last decade, what Wall Street wants and often gets, does not necessarily lead to a healthy stock market.

How does the U.S. measure up?

A look at U.S. equity market returns -- both year-to-date and three-year returns -- shows a fairly good track record compared to other markets.

U.S. markets

Dow Jones industrial average: 13.5 per cent YTD; 14.51 per cent three-year

NASDAQ: 22.01 per cent YTD; 14.33 per cent three-year

S&P 500: 18.03 per cent YTD; 13.44 per cent three-year

Canadian

S&P TSX composite: 4.11 per cent YTD; 2.59 per cent three-year

Emerging markets

MSCI Emerging Market: 10.5 per cent YTD; 3.25 per cent three-year

Europe

MSCI Europe: 10.07 per cent YTD; 1.1 per cent three-year

-- source: Morningstar Canada, as of Sept. 17

Republished from the Winnipeg Free Press print edition September 22, 2012 B10

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