The US has been the standout equity market over the past few years, having outperformed nearly every other major index.It took a boost yesterday as the results of mid-term elections handed control of the country’s legislative body – the Senate – back to Republican hands with the approval Wall Street tacit.
According to FE Analytics, the S&P 500 is up 69.5 per cent over the past three years, almost 30 percentage points ahead of closest market to have rallied as hard, the MSCI Europe ex UK index, which was coming from a low base thanks to the 2011 sovereign debt crisis.
Performance of indices over 3yrs
Source: FE Analytics
In a frank admission, the manager of the £434m Premier Multi Asset Distribution portfolio says his avoidance of US equities for the past two years was a mistake but that markets have only become more expensive since then and are now looking even more toppy.
“I’ll be the first to put my hands up and say we got it wrong on US equities over the past few years. They have always looked expensive to us. We have been underweight for the last two years,” he said.
“However, acknowledging that we have been wrong to be out of them [US equities] in the first place doesn’t mean that we are about to correct that problem by reverting that position.”
“They have only become more expensive recently as momentum has got behind them to the point now where they look, on a 10-year basis, only slightly cheaper than in 2007 and are looking more like 1999 or even 1929.”
Funds in the IMA North America sector have rallied hard over the past three years but, with the US market being notoriously hard to add value in, only 25 per cent have beaten the index.
Performance of sector and index over 3yrs
Source: FE Analytics
Evan-Cook says the medium-term potential returns from the US “look very stilted” and he has stripped back US exposure to a point where he cannot reduce further.
“We would rather be buying any other market than the US at the moment. We are not forecasting a cataclysmic correction for US equities but they do look expensive and could struggle to make rally positive solid returns from here.”
The end of the Federal Reserve’s programme of quantitative easing (QE) last week sparked concern amongst some industry bears that it may spook markets into a sharp correction, with Evan-Cook sympathetic to this view.
“The QE factor could be the event that sparks a sell-off but it is hard to know. There has been a huge amount of momentum behind these things, However, Japan’s new bout of QE may take some of the heat out of the US market if money flows there, which would be good for our positioning if that were to happen,” Evan-Cook said.
Adrian Ash, head of research at Bullion Vault, says optimism in the US despite the end of QE has propelled gold downward to its lowest level since 2010 with investors not seeing the need to hold exposure of the traditional safe haven in their portfolios.
"The Fed has finally halted QE, and the US stock market is setting new all-time highs. Gold and the stock market have now been going in different directions for more than two years, the longest stretch since gold began its decade-long bull market during the tech stock crash of 2000-2003,” he said.
Michael Stanes, investment director at Heartwood Investment Management, says the US economy is returning to capacity with indicators pointing to a rosy picture going forwards.
“We believe that the US recovery is built on solid foundations based on a range of measures and, while a weak oil price keeps the debate around deflation, inflation risks further out are to the upside. That is not to dismiss the impact of powerful global disinflationary forces in the near term. But we do not subscribe to the view that the US economy is at risk of falling into a deflationary trap,” he said.
Stanes says economic activity is increasing and is confident that the Federal Reserve will remain proactive to ensure a sustainable recovery, based on a healthy labour market and price stability.
“There is less spare capacity in the economy with rising levels of employment and capacity utilisation - a measure of actual industrial output relative to potential output. Capacity utilisation is returning to its long-term average, and is well above the low in 2009,” he said.
“Meanwhile, capital expenditure is expected to increase. There was a marked rise in business fixed investment in second quarter GDP data, while corporate balance sheets are holding high cash balances that stand ready to be deployed.”
Despite its underweight to the US, Evan-Cook’s Premier Multi Asset Distribution fund has achieved decent returns over the past three years, rising 44.14 per cent – almost double the gain seen in its average peer in the IMA Mixed Investment 20%-60% Shares sector.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Premier Multi Asset Distribution has clean ongoing charges of 1.43 per cent and yields 4.5 per cent.
