The worst of the equity correction is over in the US and although opinion is divided as to whether i...
The worst of the equity correction is over in the US and although opinion is divided as to whether interest rate rises have come to a complete halt, the next 12 months should provide investors with good buying opportunities.
For the past few decades, the equity and bond markets have pre-empted the ending of Fed tightening by a month or so and, historically, the markets have risen at least 30% over the 12 months following this trough, according to Tilney Research. This puts US equities on a firm footing for the year to come.
There are good arguments as to why the Fed will stop raising rates.
The level of IPO activity has returned to normal, the CPI and PPI data is looking good, while home sales have slowed. Personal income rose twice as much as consumer spending, which has been pushing up the savings rate.
In the meantime car, retail and housing sectors are starting to feel the strain of high oil prices.
Sam Mercer-Nairne, US investment manager at Martin Currie, is slightly less sanguine.
He says: "After the last FOMC statement, when the Fed did not raise rates, Alan Greenspan said that the signs of slowdown are still preliminary and tentative. We are very much in that camp. There have been signs of slowdown for quite a while, but the absolute levels are still high.
"We think there is still quite a good chance the Fed will have to do more. If the Nasdaq is on 4000, then it is only 20% off its high. That is not enough. Until the year-on-year change has been flat to down, then there has not really been a correction."
Tilney believes the corporate growth is the primary indicator of the strength of US equities and, despite a recent rash of profit warnings, is looking quite healthy.
For the current year, profits growth will average around 13%-15%, a figure that although lower than before, is still a good number. Meanwhile, tax margins are around 6.8%, which is their highest level in 50 years.
Mercer-Nairne has no strong sector bets at the moment, due to the high volatility of the market. He is slightly overweight energy based on the strong oil prices, which have been underestimated by most analysts.
The common assumption is that oil will drop to $26 a barrel this year and $22 next year. Mercer-Nairne thinks this is an underestimation and is underweight healthcare, following its recent outperformance.
Technology tends to have a higher beta than other sectors, so Mercer-Nairne would see a small correction as an opportunity to move out of lower beta sectors.
Irish border, resignations, market volatility and more
Revealed – successes across all 11 categories
Fidelity International multi-asset CIO James Bateman talks to Julian Marr about recent market volatility, portfolio positioning and his thoughts on the coming year
Follows Phil Young
‘Positive so far’