In the second part of our US equity outlook, a raft of star managers and sector specialists reveal where growth opportunities may occur in the coming year. For part one please click here.
Edward Smith, asset allocation strategist at Rathbones, believes the importance of concerns cited in relation to the US - stock market valuations, profit margins, the dollar, and the upcoming election - are overplayed.
Rate rises is one of the most topical. ‘Some investors are concerned rate rises will squeeze valuations and the economy in general but we don’t think that will be the case,’ Smith says. ‘If you look at the history of how markets have responded to tightening cycles, they usually continue to do well after the first rate hike.’
In fact, it often marks something of an upward trend. ‘This makes sense because when the Fed decides to tighten monetary policy it’s because the economy is doing reasonably well and they’re thinking about taking out some of the froth,’ he says. ‘Stock markets also tend to do well when the economy does well.’
While Smith acknowledges that stock valuations aren’t cheap, he believes they aren’t unjustifiably expensive. The dollar, meanwhile, is another concern that he suggests is misplaced.
‘We think the dollar will continue to appreciate but at a far slower rate than we saw in 2014 and 2015,’ he says. ‘Clearly the rise has had an impact on exporters and companies that earn money overseas but it was from one of the cheapest levels seen for the dollar.’
The decision as to where to invest money, however, comes down to which areas managers think have the greatest potential to achieve decent GDP and earnings growth within their domestic markets - and Smith believes the US must be quite high up on this list.
So how vital are macro-economic factors? A-rated Aziz Hamzaogullari, manager of the Loomis Sayles US Equity Leaders fund, looks beyond the current environment when he and his are make portfolio construction decisions.
‘We approach investing as if we were buying into a private business, so a long investment horizon is central to our philosophy,’ he says. ‘This outlook allow us to capture value from secular growth opportunities as well as capitalise on the stock market’s short-sightedness.’
Hamzaogullari looks for companies that can generate sustainable and profitable growth, and only invests when they are selling at a significant discount to the team’s estimate of intrinsic value. Of key importance are those with the most attractive reward-to-risk opportunities.
History suggests that it would be unusual for US equities to fall and stay down for a long time, according to Giles Parkinson, a global equities manager at Aviva Investors.
‘That generally only happens if a nation’s capital stock is destroyed by war or confiscated in revolution – and the US looks safe in both respects,’ he says. ‘The further out one extends an investment horizon, the greater the likelihood of earning a positive return from shares.’
Parkinson also points out that this region is home to global giants from a wide variety of industries, including manufacturing, technology and healthcare. ‘Many of the world’s greatest businesses are found in the US,’ he says.
However, Russ Koesterich, BlackRock’s global chief investment strategist, believes that stocks will face similar obstacles this year to the ones seen in 2015.
‘Valuations on US equities remain elevated by most measures, particularly based on long-term cyclical earnings,’ he says. ‘Profit margins are likely to remain under pressure as wages firm, and should the dollar appreciate, this will negatively affect exporters.’
In addition, international events may still trigger volatility, as has been seen in recent weeks with the major sell-off in China. ‘As such, we have only modest expectations for US equities in 2016, and would not expect a revisit of double-digit returns,’ he says.
Strands of resilience
‘We may see periods of volatility as concerns about slowing global growth, changing US monetary policy and the US presidential election grab headlines. However, we continue to have a positive view of the market and believe that US economic growth is well supported by the current low inflation, low interest rate environment,’ he says.
On balance, Bowers believes this stable growth environment provides a good backdrop for fundamentally-driven, active managers focused on finding the most attractive growth equities. ‘We continue to see multi-year secular growth themes in sectors such as information technology and healthcare, in which innovation and a changing landscape are creating compelling opportunities for investment,’ he says.
His fund’s secular growth themes tend to be longer-term, in the order of three to five years, one of which is continued strength from the US consumer. ‘The low inflation, low interest-rate environment, combined with steadily improving prospects for jobs and incomes have bolstered consumer optimism,’ says Bowers.
‘We believe the improving job market, rising personal income, and upbeat economic sentiment will benefit consumer spending going forward.’
US consumers also have more money in their pockets because, he argues, they have aggressively shed their personal debts and increased their savings rate since the financial crisis. ‘We see this as a fundamental, although often overlooked, driver of consumer spending strength in the years ahead, and are invested in companies that can benefit.
‘Those with quality management teams can potentially take market share, employ pricing power, and drive profits even in a challenging economic environment,’ he says. ‘Patient investors with a long-term focus can use periods of market volatility to invest in strong companies at attractive prices.’
These comments originally appeared as part of a supplement which was published with the February edition of Citywire Selector.