(July 8, 2013) — North Dakota’s booming economy and low level of unemployment makes it a prime target for finding returns, with Hermes Fund Managers calling it an emerging market in a developed state.
As small and midcap managers seek out high value targets, the London-based asset manager believes one way to find good performing stocks is to consider their local economy. If it shares characteristics with emerging market stars, it might be worth a second look.
Speaking at a press briefing last week, US SMID lead manager Robert Anstey said North Dakota’s low unemployment rate (just 3.2% compared to the US average of 7.6%) and its booming local economy made it an emerging market in a developed country.
The low jobless rate isn’t the only factor: North Dakota finds itself sat on a huge pile of Bakken Shale reserve, and produces 800,000 barrels of oil a day, making it the second biggest producer of oil in the US, behind Texas.
The only local utilities company, MDU Resources, is one of the stocks held by Hermes Fund Managers, chosen because of its lack of competition, expansion of services outside North Dakota, and its plans to spend $3.9 billion in the next five years-all from its own cashflow.
“One of the key attractions of the US as an investment opportunity is undoubtedly the differing economies which operate within the economy of the larger ‘US Inc’,” said Anstey.
Another example is the boom and bust nature of Florida’s economy. Many businesses saw the very troughs of the financial crisis, but are recovering comparatively faster than those located elsewhere in the country.
“Insurer Brown and Brown is heavily exposed to the Florida and California markets and has been well positioned to benefit from the outsized recovery,” Anstey said.
Los Angeles’s East West Bancorp bank was also cited as a good example, where the local geography has played a major part in it building a unique Chinese-American franchise, catering to a West Coast Chinese population which has grown in number and wealth over the last 20 years.
What’s more, the proposed legislation to offer undocumented immigrants a path to citizenship could swell US GDP by $1.5 trillion, according to Hermes estimates.
Saker Nusseibeh, head of investment at the firm, said/says doubling the average wage of those 11 million people would boost consumer spending by $110 billion, adding some 0.7% to the GDP.
There is something of a precedent: in 1985, Ronald Reagan’s more modest amnesty for three million illegal immigrants led to hourly wage increases of 15% for the group within five years, and in the later years many bought houses and pursued higher education.
But a citizenship status would also bring costs to the US’s coffers in the form of social benefits.
Is the US the next emerging market?
Hermes Fund Managers isn’t the only one feeling the love for the US: David Coombs, head of multi-asset at fund manager Rathbone also called America “the next emerging market”, with the “Rust Belt Tiger” leading the way.
In a recent analyst note, Coombs said: “There is growing evidence of something significant happening that could well challenge the West to East investment theme that has anchored consensus wisdom over the past 10 years.
“Recent US Q4 GDP revisions were a bit poor, but the Rust Tigers [Midwestern and North Eastern states, including Illinois, Ohio and Michigan] have certainly put in some impressive manufacturing gains.”
A trip to the US resulted in Coombs finding many strategists and fund managers feeling very bullish on the US, driven largely by high-end manufacturing returning to the US, and a reduction in energy costs, which are a game-changer.
There’s also a feeling that the fiscal cliff should no longer derail the recovery, although there will be some tightening of fiscal policy.
In addition, the housing market recovery is gathering momentum, government spending is falling, and corporate balance sheets are very strong, although much of the cash is still overseas.
“The US equity market is looking fair value. There is a feeling that in a cyclical, below trend recovery, companies that grow will demand a premium rating. We are adding a growth bias toward US exposure in our multi-asset portfolios,” Coombs added.
“In bond markets, high yield and investment grade hold little intrinsic value, despite the default risk that is priced in and that is probably too high. Care is also needed in respect of M&A activity and elevated levels of leverage. However, inflows are going into passive bond products–a changing dynamic in the market. Liquidity remains a concern.”
Is the US the only developed economy with pockets of emerging market returns? No, said Threadneedle’s European smaller companies fund manager Mark Heslop, Europe’s got them too.
The ageing populations in Europe are also driving a secular growth in demand for care homes. Orpea and Medica are two of the leading private care home operators in the capacity constrained French market, he continued.
And Vacon, a leading independent AC drives manufacturer based in Finland, is also outperforming. AC drives are used to control the speed of an electric motor in a wide range of applications, but they use less electricity than fixed speed motors, benefitting from an increased interest in eco and cost-friendly options.
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