Martin Currie’s Walker: US market at risk of 10% correction

The US stock market could correct by up to 10% in the summer, according to Tom Walker, manager of the £707m Martin Currie North American fund.

His warning comes as the Federal Reserve last week downgraded its predictions for US growth and held rates at a historic low to support the ailing economy.

Fed chairman Ben Bernanke also said inflation expectations are higher than expected, at 2.1%-2.8% for the year, up from 1.3%-1.7%.

Walker said: “It is possible the market will pull back 10% over the summer months. Valuations are still extremely attractive, interest rates are very low and earnings are growing. The valuations of many companies are at a considerable discount to their long-term history.”

Walker is hedging against inflationary pressures by investing in the resources sector.

“Inflation is an inevitable outcome of where we are in the world at the moment. Resources are a good part of the market to hedge against rises in inflation so we are slightly overweight materials and energy.”

The Fed also indicated last week QE2 would come to an end in June as planned, sending the dollar lower.

Greg Woodard, manager of GAM’s £1.5bn Star US All Cap Equity fund, has cut exposure to the consumer sector by 10% over the past year in preparation for
the end of the stimulus programme.

“It is not so much a headwind, but the end of a tailwind and it will force the economy to rely more on the consumer,” he said.

The manager added unemployment remains a major drag on the market, although it has fallen from a high of 10.2% in October 2009 to 8.8% in April.

Meanwhile, Dalton Strategic Partner’s Peter Kaye, manager of the £98m Melchior North America fund, is aiming to mitigate the risks associated with the end of QE2 by rotating out of high growth stocks.

“These are more sensitive to rising interest rates. I have cut back exposure to technology companies by 4%-5%, as a result,” he said.

Although unemployment is high, Kaye sees the fact it is falling as a boost to
consumer sentiment and has added 3%-5% to consumer cyclical stocks to reflect this.