US markets face challenges under Bush

The value of the US dollar has reached critical levels and could start to impact on markets, US-based Principal Global Investors president Jim McCaughan told investors during a whirlwind visit to Australia this week.

“We are now at the point where it gets dangerous and I don’t think [US President] Bush cares. I don’t think Bush will care about what happens to the [US] dollar until it affects financial markets,” McCaughan said.

However according to McCaughan, who heads up US$130 billion funds under management Iowa-based firm, a weak dollar may help Bush with another problem - the trade deficit.

“But I don’t think the US election was won on the US economy,” he said.

Principal’s outlook for the US economy is positive, but it is tempered with the warning that there could be a recession in 2005/6.

“The core strength of the US economy is productivity which is why the economy is growing at 3 per cent,” he said.

“Growth in the economy and productivity growth [though] means there are no new jobs so the employment rate stays unchanged.”

McCaughan said rising commodity prices is also a negative, but the US fund manager doesn’t think this move is inflationary.

“Companies have factored in these rises so inflation will not move. But if commodity prices keep rising, this could lead to a more serious downturn,” he said.

But with Bush re-elected the tax cutting regime will stay in place and McCaughan says that will make equity markets stronger in the US.

“The tax cutting agenda is going to happen and the other major change is the privatisation of social security,” he said.

McCaughan says there will be some winners and losers under another four years of a Bush administration.

Specific sectors of the US economy that will perform well will be pharmaceuticals, healthcare, oil, defence and tainted stocks such as tobacco and asbestos because there could be legislation introduced limiting class action lawsuits.

However, he said the overall US market will not perform as well as other markets, and he expects emerging markets such as the Pacific Rim and Australia to report much stronger growth.