Multi-manager – The verdict: American dream

With the latest US data surprisingly upbeat and high hopes for GDP growth on into 2015, this month we ask the experts – what is your outlook for the US equity market, given its already robust performance? 

Ben Kumar

Ben Kumar, investment manager, Seven Investment Management

The S&P 500 has increased by 190 per cent since 2009, proving critics wrong every step of the way. Investors have been calling “tops” and expressing fears over “bubbles” for five years now and the relentless appreciation has continued, with new highs being made for nearly a year now. Active managers and hedge funds have been left stranded as the index continues its grind towards 2,000 points, unfazed by the eurozone crisis, debt ceiling fears and Russia/Ukraine. So are there any catalysts we can foresee that could derail this juggernaut?

The obvious candidate is that the first-quarter contraction in GDP of 2.9 per cent was not just a one-off attributable to poor weather and instead marks the beginning of a cyclical downturn. But this seems unlikely given the strong employment data and increased confidence surveys of the second quarter. 

Next is the end of quantitative easing in the autumn – after all the mere mention of tapering sent markets south in May 2013. But the progress since last May in communication strategy should leave few investors unaware that asset purchase will cease. This also seems unlikely to derail the rise of the S&P.

The final fear is that the market is now overvalued, with investors paying too much for companies. While the price/earnings ratio is higher than historically, there are two things to bear in mind. One, the interest rate is far lower than it has ever been and two, earnings are beginning to pick up; the US market looks about fairly valued. However,
if you can stomach some risk, a fully priced US market is a good place to trim to fund opportunities elsewhere. Be optimistic about the US, but keep your eyes peeled too.

Harries

Mark Harries, head of manager selection, Aberdeen Asset Management 

Along with Japan, the US remains one of our preferred equity markets. There can be no denying that US equities have already come a long way, but given the relatively stretched nature of valuations, we assume that further index upside will need to be driven by earnings per share growth. And as profit margins are already elevated, this will have to be a function of top line expansion. Evidence from the first quarter reporting season and early signals from the second have generally been supportive.

Share repurchases and M&A had a strong start to the year and are providing major sustenance to US assets. In the case of the latter, management animal spirits seem more whetted than those of investors. Net equity supply in the US has shrunk by 3.5 per cent of market cap so far this year. This contrasts with Europe ex UK, where net share issuance has grown by €150bn in the past 12 months without offsetting increase in share buybacks.

The debate over the timing of the first interest rate increase and the pace of tapering is now becoming more urgent and polarised. Some now see QE as a permanent part of the Federal Reserve’s tool kit. What is clear is that the exit from monetary stimulus will be gradual and equities will continue to benefit from central bank support. The factors supporting US equities outweigh the negatives – on this basis and absent an external shock, we see no reason why US equities cannot continue to rise over the medium term.

Tony-Lanning-275.jpg

Tony Lanning, lead manager, JP Morgan Asset Management Fusion Funds 

Throughout 2013 US equities were one of our highest conviction regions. It is often observed that active managers in the US find it difficult to consistently beat benchmarks and that as a result investors would be better off simply buying passive funds instead. But 2013 was in fact a solid year for active managers of large cap funds. Many managers were able to exploit a convergence in valuation spreads, giving a welcome tailwind to returns. As correlations fell, active managers did well and we began 2014 with high expectations that the environment remained positive.

The first half of the year has been more challenging but we believe the macro backdrop remains supportive. Many of the surveys for business spending and orders for capital goods look positive. While investors are poised for the start of a rate-tightening cycle we expect the Fed to remain dovish and for interest rates around the world to stay low. 

Much has been made of the poor weather at the start of the year in the US and its impact on data, which we expect to show material improvement. The Fed remains focused on jobs growth but we expect the labour market to continue to recover and, along with a continued house price boost, to help support the confidence consumers need to spend.

With the S&P trading near an all time high it is crucial that company earnings continue to meet expectations. First quarter earnings came out better than expected and at the start of the second quarter earnings season the big banks have already beaten market expectations. So despite a more challenging 2014, US equities have rewarded investors.