Investors in US equities had a number of significant issues to contend with in recent months, the la...
Investors in US equities had a number of significant issues to contend with in recent months, the latest being the US presidential election.
Just a few months ago, the primary concern was the Fed's thus far ineffectiveness in slowing the economy, even after six consecutive rate hikes. The focus of concern quickly shifted toward the hard landing scenario.
The economic outlook was further complicated by the effect of higher oil prices. A continued slide in the euro was yet another element, which could negatively impact corporate profits of US multinationals.
Then there were sectoral crosscurrents. Growth estimates for some subsectors of technology were reduced from very high levels to more sustainable growth rates.
While still attractive rates of growth, directionally, cuts are not viewed favourably by holders of high growth, richly valued stocks. Credit issues plagued the banks and political risks weighed on the pharmaceuticals.
Taken in aggregate, it is not difficult to see why major market indices have fallen in recent months. Favourable fundamental news tends to get discounted to an extreme level.
Likewise, investors tend to flee from unfavourable developments and uncertainty without regard to valuation. Currently, the latter scenario has taken hold and provides a very attractive opportunity for investors in US equities.
Moving on to the economic environment, the first thing to ponder is how and why consensus thinking shifted so rapidly from too much growth to too little growth.
What happened to the in-between scenario? Maybe the Federal Reserve "got it right?" Perhaps policy is appropriate to guide the economy to a slower, sustainable pace. But, in the event that growth slows too much, we are highly confident that Greenspan and Co will take the appropriate action to add liquidity into the system and avert a hard landing much like late-1998 during the emerging markets crisis.
The continued slide in the euro hit home to US investors when high-profile US companies, like Colgate Palmolive and Procter and Gamble, quantified the impact of the falling currency on corporate profits. Looking forward, I have some fairly strong views on the euro. The currency is cheap and near a bottom.
My confidence is bolstered by the European Central Bank's willingness to step in and provide support just below current levels. As US domestic growth slows over the balance of the year, the growth disparity with Europe narrows, further supporting the beleaguered currency.
How should an US portfolio be positioned in a period of moderating, sustainable growth? The following sectors are attractive: health care, technology and financials, but emphasise that stock selection is key.
Richard Leadem is chief investment director, North America American Express Asset Management
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