21 October 2008

ALLIANCE TRUST SAYS NEW US PRESIDENT FACES ‘BITTER COCKTAIL’

• Credit crunch has started to affect real economy with US retail sales declining for the past three months
• With falling consumer confidence, stabilising the economy will be a key task for the next US President
• Since the US still has to work its way through a deterioration in credit quality stemming from economic cooling, recovery will not be fast

Alliance Trust Head of North American equities Matthew Strachan says the next US president to be elected in November 4 polling will be handed “something of a poisoned chalice”.

Commenting on the outlook for the US, Strachan says: “Although either candidate can pin the blame on the previous administration, it still leaves them with a bitter cocktail of rising unemployment, a growing fiscal deficit and the problem of how to pay for all the rescue packages put in place. Classically there are two ways of paying, either increasing the tax burden or inflating away the real value of the debt. Neither is particularly palatable and the latter is currently difficult to engineer.”

“The successful 1992 presidential campaign of Bill Clinton is said to have centred around the maxim, “It’s the economy, stupid!” This US election is no different, although the economic mood is far bleaker. The extraordinary machinations in the credit markets and near paralysis of the banking system have left many feeling helpless. Ultimately, once the new president is elected, it is what happens to the economy that will count for most people.”

“It is already too late to prevent real economic damage. Asset values, whether shares or houses, are significantly lower than last year, not something that can be said for most people’s borrowings. Although some in America are choosing to return their debt, with their house, to their lenders, as much of the lending is non-recourse.”

“Most recent figures show a sharp deterioration indicating the crisis is starting to take its toll. Retail sales have now fallen for the last three months, something not seen since 1992, and that means the outlook for consumer spending in the third quarter is unpromising. Since consumption accounts for around 70% of GDP, the first official 3Q GDP estimate to be released at the end of October is likely to be worse than most had been expecting.”

“There is another spoke in the wheels: the economic order of events in this recession are unusual. Normally an economy would slow and unemployment rise before the credit cycle turns negative. This time we got a credit crunch first. This means the US has still to work its way through a deterioration in credit quality engendered by an economic cooling. Meanwhile consumers will be trying to repair their own balance sheets. None of this bodes well for strong economic recovery. America’s economic flexibility, dynamism and powers of recovery are unsurpassed, with its labour laws helping companies, but this time recovery will not be fast.”

“All of this can be contrasted with America’s northerly neighbours, Canada. Although they are experiencing a chill wind from America’s economic downdraught, they have the benefit of lower levels of borrowing in the economy, particularly at the government level. They have also just had a, little reported, general election where the vote was in favour of the status quo, a Conservative minority government under the leadership of economist Stephen Harper. Any recession there will hopefully be mild and with capacity for fiscal stimulus and a consumer likely to benefit from any reduction in interest rates, their economic recovery should be much more marked. “

Shona Dobbie, Head of the Alliance Trust Research Centre commented:

“At the moment the prospective economic policies of the presidential candidates are being overshadowed by the cost implications of the financial rescue package for the banking system and by the current turmoil in financial markets. The first and most crucial job for the newly elected president will be to inject much needed confidence into the US economy. Investors around the world will be watching with anticipation the implementation of new economic policies from the president.”

Contacts

Jane Holligan, Media Relations Manager Anna Schirmer / Stuart Lerman / Anna Moulds

Alliance Trust Lansons Communications

Tel +44 (0)1382 306064 Tel +44 (0)20 7490 8828

Mobile 07793 296813 Email alliancetrust@lansons.com

Email jane.holligan@alliancetrust.co.uk

Web www.alliancetrust.co.uk

Notes to editors

1. Alliance Trust PLC is a self-managed investment company with investment trust status. A FTSE-100 company, it is the largest generalist UK investment trust by assets listed on the London Stock Exchange.

2. Founded in 1888, the company is based in Dundee and has offices in Edinburgh, London and Hong Kong.