But, unlike foreign markets such as Japan – nigh on two decades of deflationary pressures – and China – still too emerging for many despite the longer-term promise – the US cannot and should not be ignored.
The US has proven itself time and again as a place where entrepreneurial flair leads businesses to develop shareholder value on a scale unattainable anywhere else. There is a vast array of globally leading companies based there, offering investors the chance to buy top class assets less directly correlated to the performance of the UK economy.
The sheer number of US stocks is a draw in itself, as is their performance illustrated by two key benchmark indices.
In sterling terms, total returns from the Russell 2000 (-9.94 per cent) and S&P 500 (-12.10 per cent) indices have outperformed the IMA North America sector (-14.59 per cent), and the FTSE 350 (-19.24 per cent), FTSE All Share (-19.33 per cent) and FTSE Small Cap (-19.97 per cent) indices in the 12 months to 26 June, according to Financial Express data. Over 3 years, the situation is similar, these US indices outperforming the UK ones.
Performance of indices over the past year
Source: Financial Express Analytics
David Forsyth, manager of the Martin Currie North American fund pointed to factors such as the Obama administration’s efforts to push through fiscal stimulus setting the scene for further improvements.
“It seems to be working. Credit markets are showing signs of freeing up, which should allow companies to start borrowing – and investing – again. M&A activity is returning. Companies have been able to issue new equity. The confidence of US consumers is rising and industrial activity surveys are picking up.”
The medium-term is where UK investors really stand to benefit, given stock market valuations of US world market-leading companies such as Apple and Google, he said.
These and other stocks such as IBM, JPMorgan Chase, Cisco Systems, Wal-Mart, McDonalds, and Procter & Gamble are among the top-10 holdings in Forsyth’s fund portfolio.
Managers in the IMA North America sector also seem keen on betting on financial services companies. According to Financial Express data four out of the five most bought stocks in this sector over the past three months are JPMorgan Chase, Goldman Sachs, Morgan Stanley and Wells Fargo & Co, with Apple being the fifth.
It is not all plain sailing for investors in US stocks, however.
Julian Jessop, chief international economist at Capital Economics, said that the deflation threat to the US economy had not been totally defeated, because the effects on prices in the US of rising unemployment and the creation of so-called spare capacity in the economy are yet to be felt in full.
“We feel that the risk of a more prolonged period of falling prices is still very real.”
“The worst is over, but it is not all fixed,” said Tana Focke, manager of the Smith & Williamson North American fund.
Where there is further debate, she added, is in the view from investment professionals that while the worst of the wider economic malaise may be over, in terms of investment opportunities there is some expectation that the market lows could be tested again by the autumn.
Focke’s own portfolio remains “quite defensive”. It recently added healthcare, and the top-10 reads like a who’s who of some of the biggest US companies tapping into non-discretionary consumer and business spending: Exxon Mobil, Johnson & Johnson, Chevron, Microsoft, IBM, Cisco Systems, Procter & Gamble, and JPMorgan Chase.
Like Capital Economics, Focke points to ongoing price cuts and rising unemployment as factors that, together with rising savings rates are leading to an impact on sectors such as retail, which is an important constituent of the overall US economy.
With US consumers also less likely to buy their way out of recession by acquiring new cars and houses, the burden of recovery is falling on public spending. But, States themselves are under pressure to balance their books, and with people spending less State tax receipts are also falling.
There is also an additional level of “uncertainty” regarding sectors such as financial services and healthcare because of reforms to regulation flagged by the Obama administration, Focke said. Although announced, the administration is yet to spell out the details of all its proposed changes. Without this it is difficult to make calculations of relevant effects on asset values, for example the degree to which any regulatory changes affecting the US healthcare system could impact on the ability of drugs manufacturers to develop pricing of their products for that market.
Aled Smith, manager of the M&G American fund stressed the importance of continuing to seek out the companies that are unloved by the market, but which retain an edge in their respective industries.
“There are companies that have been forgotten about because their end markets are out of favour but continue to have a competitive edge in terms of the structure of their industry, or the technology that they have, that is going to be needed and increasing in demand over the next five years,” Smith said, noting examples such as United Technology and Acuity Brands.
Acuity Brands make efficient lighting. United Technologies makes things such as efficient elevators that only cost $1 a day to run through the use of gravitational forces. The company was sold off because of exposure to construction exposure but is deemed to be well run and with “exciting” products.
Smith also veers into the healthcare and information technology sectors, which are the two largest sector positions in M&G American.
Smith added: “The healthcare position is a function of my view of industry-wide steps to improve efficiency. In regards to the overweight position in information technology stocks we believe that the poor economic environment has resulted in the market focusing too much on the degree of cyclicality amongst some of these stocks.
“The market has also underestimated the sustainability of their returns. Companies such as Oracle and Adobe produce software applications that are essential business tools to many of their end users. Moreover, we believe that the market has become overly focused on just new business growth, neglecting the strong recurring revenues that these companies enjoy from existing customers.”