Investors should feel positive about the prospects for the US market this year despite concerns surrounding a potential recession, according to Miton’s Hugh Grieves (pictured) and Nick Ford. 
Weak US economic data released at the latter end of last year led many investors to worry over whether the economy was on shaky ground – while factory data seemed to signal a further growth slowdown, the US high yield market came under pressure following default fears which therefore led to a widening of credit spreads.
According to data from the Investment Association, US equities took a significant tumble in the popularity stakes during February this year, experiencing net retail outflows of £107m compared to its average outflow of £17m over the last 12 months.
This means it has seen the worst outflows out of all of the Investment Association regions both in February and over the last year, with the exception of Asia which has seen 12-month outflows of £88m.
Despite the market’s shaky start to the year though, the S&P 500 index has provided a positive total return of 5.14 per cent since the start of 2016 compared to the FTSE 100’s return of 0.68 per cent and the MSCI AC World’s return of 3.64 per cent.
Performance of indices in 2016
Source: FE Analytics
“At the end of last year we had the Capex slowdown, energy headwinds and the China slowdown. Clearly that had an effect on the manufacturing sector within the US, whether you’re supplying valves or pipes directly or whether you’re providing services to those companies – there was a big ripple effect at the tail-end of last year and at the beginning of this year,” Grieves said.
“It seems now that things are picking up again and that that was just a blip, so we’re not too concerned at this present time.”
Another factor that has changed since the end of last year that Grieves points out is the oil price. In February this year, Goldman Sachs warned that oil could drop below $20 per barrel. Now though, the price of Brent crude oil is at $41.94 at time of writing and, while Grieves says that this is not particularly healthy, he says it is far less disastrous than people expected.
“We’re also bottom-up stock pickers. We try to be aware of what’s going on but we don’t try to forecast it,” Ford added.
“We don’t claim to have an advantage over investors when it comes to forecasting the economy, I think where we like to think we have an advantage is our stock-picking skills, so we can’t fit the pieces in the right place based on what we’re seeing in terms of the big picture.”
Miton US Opportunities, which celebrated its third anniversary last month, is able to invest across the cap spectrum and is not constrained to a benchmark, which the managers say allows them greater flexibility than their peers.
Not only this but, given the negative sentiment towards the region, the managers say there are plenty of attractively-priced and lower-risk opportunities in the US from a bottom-up perspective that investors could be missing out on.
The duo lists three myths deterring investors from buying into the region in the below article:
The US is over-priced
“This I would say is the biggest myth - that the US is over-priced. The US is always expensive and there’s a really good reason for this when you compare the US to Europe,” Grieves said.
“Europe has got banks, energy companies and coal miners and these aren’t highly-rated companies because their long-term prospects aren’t that great. If you look at companies in the US they tend to be higher-growth, higher-margin and that’s reflected in the valuations – they’re higher quality businesses.”
“When people say the US is expensive, I would say it’s always expensive and for good reason – because it’s home to higher quality businesses.”
The US is a mature, low-growth economy
“There are certainly parts of the economy which are not particularly high growth, but there are a lot of very exciting dynamic companies in America that are doing really well,” Ford pointed out.
“We would argue that there are a lot more of these for investments to choose from than in the UK - what is the European equivalent of Facebook, for example? I don’t think there is one really.”
The manager says that the US is home a number of powerful, dominant, global companies such as Google and Amazon. While the fund owned these two stocks last year, however, the managers sold out of them because of their valuation discipline.
Nevertheless, they made a significant amount of money from holding these stocks and Ford points out that there are numerous hidden gems at the smaller end of the cap spectrum which have far greater growth prospects than small-caps in other developed regions.
“If you’re a small company in America and you have a great product or service, you have the second-largest economy in the world to attack,” he continued.
“Walmart stores started in Arkansas – Sam Wilson had his first store there. The reason it was pretty much the most successful retailer in history was because he opened another store in the next town and then a few years later another one near that town, but there are thousands and thousands of towns in America so he could keep on adding new stores.”
“Investors who bought Walmart at $1 are looking at up to $1000 now. It’s that kind of opportunity you get in America that I would argue is hard to come by in other markets.”
The US has unfavourable demographics
Grieves says that most people believe the US has an aging population in a similar way to other developed markets such as Japan and the UK.
“Japan is rapidly aging. You essentially have a shrinking workforce and if you have a shrinking workforce it’s very hard to grow your economy,” he said.
“But when you look at the birth rate in the US it’s higher than Brazil, it’s higher than Russia, it’s higher than China and it’s far higher than Europe.”
“Is the US an emerging market? Okay, it’s emerged but it has many similar traits when it comes to population growth that you would expect from many other countries. I certainly think it gives the US a tremendous advantage over Europe in terms of long-term growth.”
Over the last three years, Miton US Opportunities has provided a total return of 44.46 per cent compared to its sector average’s return of 37.22 per cent. It also has a top-decile annualised volatility, top-decile risk-adjusted returns as measured by its Sharpe ratio and a top-decile maximum drawdown, which measures the most potential money lost if bought and sold at the worst times, over the same timeframe.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Miton US Opportunities has a clean ongoing charges figure of 0.85 per cent.
