US equities have been some of the main beneficiaries of the equity bull run over the five years to 13 August, with the 105.69 per cent rise in the S&P 500 outpacing the FTSE 100’s 67.38 per cent, the Nikkei 225’s 34.08 per cent and the Euro Stoxx 50’s 30.09 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Despite this asset allocators tend to be running an overweight to US stocks, as the latest Bank of America Merrill Lynch Global Fund Manager Survey shows there was a net 6 per cent overweight to the asset class.
JP Morgan Asset Management chief global strategist David Kelly recently noted that the S&P 500 has a forward P/E ratio, using operating earnings, of 15.1 times - which is below its 25-year average of 15.6 times.
Other metrics, such as forward earnings yields, also suggest values remains, according to Kelly.
The strategist argued that it is the perception of US equities’ rally rather than the underlying numbers that make them seen as overvalued.“Since hitting a low on 9 March of 2009, the S&P 500 index has risen, with few major corrections, for five years and five months. Instinctively, this feels like too much of good thing,” he said.
However, Gary Potter (pictured) and Robert Burdett, co-head of the F&C multi-manager team, are preferring to run an underweight to the US with their range.
FE Analytics shows the £941.9m F&C MM Navigator Distribution fund, for example, has just 6.78 per cent in North America.
Anthony Willis, who heads global macro research for the F&C multi-manager team, says there seems to be little value in US equities at the moment despite an abundance of good sentiment around the health of the world’s largest economy.
“US equities look fully valued for the moment; the reasons for this are pretty clear,” he said. “We have seen another supportive corporate earnings season with above average earnings ‘beats’ on both earnings per share and revenues and the economic backdrop is also positive.”
“The reason we’re underweight the US is because that, in the knowledge that QE is coming to an end very soon we feel that the market may struggle to make progress. The correlation between expansions in the Fed’s balance sheet and the performance of the S&P is very high; hence as the Fed winds down QE, the market will need to find a new source of support.”
The US has benefitted from steadily improving economic numbers.
The latest data from the US Department of Commerce shows the economy expanded by an annualised 4 per cent over the second quarter of the year, while inflation is close to the Federal Reserve’s longer-run target at 1.9 per cent.
However, this improving economic backdrop is increasing concern that the Fed will soon move to lift interest rates from their historic lows.
The central bank is already cutting back on its quantitative easing programme, with this stimulus expected to come to an end in October.
Though the weightings are very low, Potter and Burdett hold the Findlay Park American, Polar Capital North American, Legg Mason Royce US Small Cap Opportunity, Brown Advisory American and Conventum Lyrical funds.
The Findlay Park American fund, which takes a value approach using a bottom up investment style, is a stalwart in a number of the multi-managers’ portfolios.
The fund has an FE Crown Rating of four and has returned 114.94 per cent over the past five years.
It has 79.25 per cent in US equities, with 9.86 per cent in Latin America, 2.39 per cent and 8.50 per cent in cash or fixed interest.
The portfolio’s top holdings include drug retailing chain Walgreen, broadcasting and cable company Comcast and Mexican bank Grupo Financiero Banorte.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Potter and Burdett have been seeing better opportunities in Japan and Asia, given the lack of value in the US.
They own the Coupland Cardiff Japan Alpha, Coupland Cardiff Japan Income & Growth, Jupiter Japan Income and Nomura Japan Strategic Value funds for exposure to Japan, as well as Schroder Asian Income Maximiser, Prusik Asian Equity Income and Coupland Cardiff Asia Alpha for Asia-Pacific equities.
However, they have not ruled out a return to US equities should valuations get to more attractive levels.
Willis added: “We’re positive on the US but feel the good news is in the price for now. The S&P is very close to record highs and we are concerned about the end of QE over the coming months. We do think the economic and corporate news will improve but given the current market level we may have a better entry point.”
