Investing in the US might seem like a giant leap of faith in the current climate. Faced with an unpa...
Investing in the US might seem like a giant leap of faith in the current climate. Faced with an unpalatable mix of ongoing problems in the financial markets, a pronounced economic slowdown and a housing market slump, investors could be forgiven for their reluctance to hold North American stocks. But before turning their backs on the US, shareholders should remember that the country's stockmarket remains the largest in the world. With some 5,000 listed companies, the US equity market is also the most diverse, offering stockpickers an unrivalled breadth of market-leading firms from which to choose.
Whether they are mining, pharmaceutical or engineering firms, most US businesses share a positive attitude towards efficient capital allocation and rewarding shareholder loyalty. Indeed, their ability to produce returns above the cost of capital has been one of the major drivers of the US stockmarket's success over the past decade.
Crucially, an investment strategy that is focused on efficient capital allocation has a place throughout the economic cycle; a management team's decision to restructure or spin off a division will go ahead regardless of what happens to US GDP. In addition, not everyone realises the enormous potential of this disciplined investment approach to capital allocation, making the valuation of the US stockmarket the most attractive it has been for some time.
The appeal of the US also lies in the market's relatively defensive nature, namely a number of large, well-established companies such as healthcare group Johnson & Johnson.
During times of uncertainty, investors understandably want some degree of security from their investments and will seek refuge in businesses whose products they know, and are confident can achieve sustainable returns irrespective of the economic climate.
Admittedly, the US stockmarket has been heavily bruised since the onset of the credit crunch, but the losses suffered by its Japanese and European counterparts have been greater. Put simply, the defensive qualities of US equities have served it well, meeting investors' need for high-quality, dependable businesses that can grow their earnings at a steady pace no matter what.
In more benign economic conditions, undervalued business franchises, such as retail giant Wal-Mart and cereals manufacturer Kellogg, were cast aside for being too dull. Today, however, the situation is different and their steadfastness is regarded as an attribute.
With their instantly recognisable brand names, diversified businesses and strong cashflows, Wal-Mart and Kellogg can give investors the stability they crave in adverse conditions.
The improvement in their share prices at a time of such acute volatility shows that equity buyers are starting to appreciate the value that these two once-neglected conglomerates have to offer.
- By Aled Smith, manager of the M&G American Fund
- In spite of leading the global charge downwards, the US stockmarket has defensive qualities
- The diversity offered by the US is a benefit in difficult times
- 'Boring' stocks like Wal-Mart and Kellogg are returning to favour.
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