McDermott: US recovery yet to runs its course
Darius McDermott, managing director of Chelsea Financial, discusses whether or not the US will be able to continue its strong run, and recommends the best ways to play the market.
By Darius McDermott, Managing director of Chelsea Financial
Sunday July 01, 2012
Over one and three years the S&P 500 has been the best performing major market index. It has out-performed not only developed markets but also Asia ex Japan and emerging markets.
Small-cap funds in particular have done very well. Presidential election years tend to be positive too – up 81 per cent of the time – and, so far this year, that has been the case again. A number of managers we talk to are still bullish on the asset class.
Reasons to be bullish
James Abate, manager of the Psigma American fund says: “We are in the third year of profit improvements and the 32nd straight month of expansion in the manufacturing sector. To me this indicates we are mid-cycle and, after 10 years of outperformance of small caps, we are at an inflection point where when large caps are likely to outperform.”
VAM fund managers are also positive about US manufacturing: “Labour costs have improved with the gap between emerging market and US factory wages narrowing. US factories are becoming more efficient and the Wall Street Journal recently reported that US factory workers are three times more efficient than Chinese workers. Natural gas, a key cost for US factories, is in abundance in the US and extremely cheap compared with the rest of the world.”
Sebastian Radcliffe, manager of the Jupiter North American Income fund, is particularly upbeat about the US housing sector: "After the massive credit-driven property bubble burst in 2007 the market has now begun to show signs of stability.”
“With house prices and mortgage rates both very low, affordability measures in the US appear to be at their best in decades. The average US house price is only 2.7 times the average family income, compared with over 5 times in the UK and I believe the US housing market currently offers some of the greatest opportunities we could see in a generation."
Reasons to be bearish
On the other hand, it's not a one-way bet by any means. Recent unemployment and manufacturing data has been disappointing but Julian Chillingworth, chief investment officer at Rathbones says that this is more a reflection of the market being over confident about the US at the start of the year and earnings estimates being too high, especially in the technology sector. He thinks the data will pick up towards the end of the year and, while there are risks around the fiscal cliff, remains overweight US equities.
Polar Capital's Andrew Holliman also pointed out that the US is towards the top of the profit cycle and the US deficit still needs to be tackled. Neither is the US immune to the eurozone crisis and a slowing China. And Albert Edwards of Société Générale is ultra bearish, expecting the S&P 500 to decline decisively below its March 2009 low.
My own view is that the US market is pretty fairly valued at the moment, and certainly not as cheap as other developed markets. But it does continue to perform reasonably well and the dollar may appreciate which would be an added bonus for UK investors so it is worth having a portion of your portfolio in the asset class.
My favourite funds are the Neptune US Opportunities
and AXA Framlington American Growth
. For an income play, investors could try the Jupiter North American Income
or Legg Mason US Equity Income