US equities will remain volatile in the coming months and valuations, though pegged back, could have...
US equities will remain volatile in the coming months and valuations, though pegged back, could have further to fall as investors fret over high multiples and negative corporate news.
Fund manager at Baring Asset Management, Chris Lees, says the fundamental issue is simply the valuation of the market.
'US equities are cheaper than they were, at about 25 times earnings, but this is still expensive compared to this point in previous cycles, where 12 to 15 times was more usual,' he says.
'We do not believe the market will revert to that level, as interest rates remain much lower than in previous cycles. Until we start to get more positive corporate news, there could still be a little more to come out of the market. Even so, current levels should still provide rewarding opportunities for longer-term investors wishing to accumulate some very high-quality businesses selling at a discount to the market.'
Despite recent underperformance, Kent Shepherd, manager of the Franklin US Equity fund, is also bullish on the region, pointing to the fact US consumers have shown surprising resilience.
'They have continued to spend despite rising unemployment rates,' he says. 'Consumers have been supported by a combination of lower energy prices, tax rebates, warm winter weather, strong residential prices and lower interest rates.
'Lower rates have helped keep the US housing market strong and enabled a massive home mortgage-refinancing boom. Home mortgage refinancing alone has put roughly $5bn-$10bn worth of cash in the form of interest cost saving into US households' wallets over the past year.'
However, director of global economics at Henderson Tony Dolphin believes that, going forward, the boost from inventories will fade.
He feels companies' balance sheets appear stretched and the level of investment spending relative to profits still looks high, which will mean consumer spending levelling off.
On the whole, however, Dolphin believes the US macroeconomic view is reasonably attractive. 'The US economy has come through pretty well,' he says. 'The country was in deep recession and is now operating close to capacity.
'Throughout the slowdown, productivity has continued to grow in areas such as technology. On the whole, unit labour costs are falling, margins are increasing and profits are growing.'
At current levels, Lees says, he is already starting to see some interesting opportunities in the market.
'Many high-quality US manufacturing companies, such as Honeywell and Pactiv, trade at discounts to the market and yet have higher growth rates,' he says.
'Companies in the defence sector, such as Lockheed Martin and Northrop Grumman, offer good earnings growth as the US government increases defence spending, but are still very attractively valued.
'An emerging theme in our portfolios is software. After their significant falls this year, many of the leaders in the sector are at near market multiples for the first time in years. The major shadow on the horizon is the accounting treatment of share option programmes.'
Opportunities at current levels.
Interest rates remain low.
Continuing consumer resilience.
Recent falls in the market.
Accounting problems in many companies.
Market more expensive than previous cycles.
Annuity market worth £4bn in 2017
For ‘distress’ caused
Oversees £30bn of advised and D2C assets
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