Where to find value in US markets one year into the Trump trade

US equities managers reckon there are still pockets of value despite stocks rallying more than 20 per cent since the election of Donald Trump to the presidency one year ago.

De Lisle America tops the North America sector for returns since the Republican reality television host took the White House on 8 November last year, returning 32.3 per cent. New Capital US Growth and Morgan Stanley US Growth rounded out the top three, returning 32 per cent and 31.8 per cent respectively.

Over half of De Lisle America is in the financials sector, while Morgan Stanley US Growth has 41.6 per cent in the technology sector. New Capital US Growth’s top 10 holdings is dominated by FAANG stocks with Apple, Facebook and Amazon the largest direct holdings.

The JPM US Smaller Companies and Legg Mason Royce US Small Cap have topped the North American Small Cap sectors over the one-year period, returning 37.3 per cent and 34.1 per cent respectively.

Hermes US SMID Equity fund manager Mark Sherlock says both the S&P 500 and small and mid caps are both trading around 18x forward P/E towards the high end of its historic average. “Clearly the US market has had a good run over a number of years.”

The £858.8m fund is fourth quartile for the last year returning 14.6 per cent compared to 20.7 per cent in the North America Smaller Companies sector, but is second quartile over three and five years.

The main North America sector returned 19.7 per cent over that period.

Sherlock argues small and mid caps normally trade at P/Es a couple of points ahead of the large-cap index. “On a relative basis SMID looks attractive.”

Despite an initial rally in November, domestic US companies went on to underperform companies that earn the majority of their revenues offshore, IHS Markit Research Signals analysis released over the summer showed.

Tax cuts would also disproportionately benefit small and mid-caps, which are more likely pay the full 35 per cent corporation rate, he says.

“Trump has achieved precious little so far, but I wouldn’t rule out the possibility of tax cuts at some point in 2018.”

AB Select US Equity portfolio manager Kurt Feuerman is eyeing multinationals with big offshore cash balances as tax reform beneficiaries. He argues even if a watered-down version of tax reform passes repatriation is unlikely to be scaled back because it’s revenue generating.

Feuerman describes banks as a compelling opportunity, noting that Bank of America, Citigroup and JP Morgan still trade at 14x to 15x projected earnings despite recent rallies.

The financial sector is “first in line” for deregulation and could result in a 20 per cent pre-tax profit increase, he points out.

Trump’s appointment to the US Fed, former Wall St banker Jerome Powell, is said to favour financial deregulation.

Sherlock says retailers are cheap on the threat of Amazon, while the “significant outperformance” of growth over value have also created pockets of opportunity and high P/Es in tech have skewed the index.

FundCalibre names Hermes US SMID as a fund that will benefit if tax cuts go ahead, while Lazard US Equity Concentrated has flexibility to adapt to market conditions and the Axa Framlington American Growth fund performs well through growth phases.