Following Independence Day on 4 July, Investment Week asks leading fund managers for their views on the future of the US market
Fidelity US Dollar Bond
The availability and cost of credit as a result of the financial crisis is no longer as large a concern for higher-quality firms. Instead, the focus has evolved to a lack of demand for credit by these firms.
Even with relatively low funding costs, investment grade companies may still be hesitant to increase capital expenditure and further increase inventory levels.
Five leading managers on what US equities have in store
There is a lack of confidence in the sustainability of economic growth given the unwinding of fiscal stimulus measures and the rebuilding of private sector savings, and there is uncertainty over whether pricing power can be achieved into this environment.
I believe US investment grade corporate bonds still offer good value, yielding 4.4%, with healthy and robust balance sheets. However, given greater concerns of leveraged buyout (LBO) activity and inorganic growth pressures, leveraging on extensive bottom-up credit research to pick up the best-in-class names is essential.
While US Treasury yields have rallied to 3.1% in Q2 this year, they still offer good value as I do not anticipate the Federal Reserve will increase interest rates anytime soon in an environment of low inflation expectations, uncertain growth prospects and high levels of resource under-utilisation in the US economy.
Fidelity America and Fidelity American Special Situations
The US market will likely remain choppy. This is due to the global macroeconomic uncertainty created by the European sovereign crisis, the sustainability of Chinese growth, and concerns over mid-term US growth once government stimulus is removed.
The coming months should provide clarity on some of these macro issues, and with valuations very attractive, this could eventually be supportive for share prices.
I believe the market is likely to reward quality growth companies since they will fare well even in a low economic growth environment, and many currently look cheap having been left behind in the rally over the past year.
The US corporate sector is recovering well – S&P 500 companies are expected to generate $500bn of free cashflow in 2010. Concerns remain, however, that the sovereign debt problems in the eurozone would spread beyond the euro area, leading to fears of a double-dip recession.
While volatility is likely to continue as long as macro concerns remain prominent, investors should remember that having reacted quickly to repair their financial standing during the recession, many US company’s are now cash rich, giving them the flexibility to weather short-term economic turbulence.
Investors would do well to remember the world-leading propensity of the US corporate sector to generate wealth for their shareholders over the long term.
Fidelity MultiManager Growth
I remain constructive on the outlook for US equities for the rest of the year – monetary policy will be supportive, and, in contrast to Europe where the talk is about austerity, it appears fiscal policy will remain so too.
Corporate earnings have generally beat expectations, but I think stockpicking will remain key, and in a low-growth environment, companies that can continue to provide steady earnings growth will be rewarded.
High-quality stocks – especially those less reliant on domestic consumption and more on overseas earnings from emerging markets – are likely to do well.
While longer-term problems remain over the value of the dollar, this should not be too much of a hamper versus sterling at the moment.
Threadneedle North America Select
The US equity market has recently benefitted from the perception of being a relatively safe haven for increasingly risk-averse investors. This comes as equity markets around the world have faced renewed uncertainty stemming from investor concerns over government deficits, an end to central bank stimulus measures and speculation of a double-dip recession.
One advantage the US has, and perhaps the most overriding, is the sheer depth and breadth of its market. Its immense scale still sets it apart from any other country.
Another factor is the enduring advantage of a relatively light regulatory regime, coupled with a transparent, predictable and evenly applied legal framework.
US companies have shown themselves capable of adjusting their cost bases and many companies have restructured their businesses to benefit.
We remain optimistic about the prospects for US equities. The average equity today represents much better quality than at any time in the past 20 years, while valuations are the most attractive they have been since the early 1990s. Cashflow, debt to equity and capital allocation are all better than they were at that time.
We believe many US companies are well positioned to benefit from rising economic activity.
This article first appeared in Investment Week
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