It is an old chestnut that the majority of positive returns from equities occur from November to the...
It is an old chestnut that the majority of positive returns from equities occur from November to the end of April each year, hence the adage that investors should 'sell in May and go away'.
We have seen some strong returns from markets over the past couple of months, and the US equity market has been no exception, returning 15% in US dollar terms from the March lows. We have also seen a sharp fall in the value of the US dollar against other global currencies, culminating this week in a return to the launch value against the euro.
This raises two questions for investors in the US equity market. The first is whether this is likely to mark the peak of the market for the time being, and the second is whether we are likely to see further US dollar weakness from here.
Our response has to be that we believe the medium and longer term prospects for US equities are excellent. Of course, seasoned market observers might think that it is rare to see investment managers advocating anything else ' but we have followed up our view with action, taking US equity exposure up from neutral to an overweight position in our global equity portfolios.
On the second point, we retain our long-term strategic view that the US dollar will tend to weaken. However, the recent move has been very rapid, and we could well see the dollar stabilising in the short term.
In an environment where global economic growth is likely to remain weak and interest rates are likely to remain low for the rest of 2003 and into 2004, we believe the prospects for economic and earnings growth in the US are more encouraging than they are in most equity markets around the world. The renewed determination of the authorities to provide sufficient stimulus to generate growth has reinforced our optimism, and the weakness of the US dollar is proving to be a strong positive for US multinationals. In aggregate we are looking for total returns in the region of 10% from US equities over the next 12 months.
While, on balance, the economic signals in the US remain quite weak, there is undoubtedly a modest recovery underway in the economy and in corporate profits. Accordingly, we have positioned our portfolios to participate in the upturn, although relative sector over and underweights remain restrained given the rotational nature of the market and lack of compelling sector themes.
We focus our research and stock selection on companies offering the most attractive combinations of solid earnings growth and valuation, which we have been able to identify across all sectors. Recent additions to our portfolios include retailer Best Buy and consumer products group Colgate-Palmolive.
Best Buy sells consumer electronics products and appliances through a chain of almost 550 stores in the US. As in any retail segment, the lowest cost business model dominates, and Best Buy is the lowest cost retailer in this market. As such, it is very strongly positioned to benefit from rapid growth in sales of digital products such as DVD players as they become mass market items. At the same time, valuations are attractive for the company, trading at close to a historical low relative price/earnings ratio. We believe the company offers excellent prospects for higher than expected earnings growth from here.
Colgate-Palmolive is the world's largest seller of toothpaste and also makes a range of personal care and household cleaner products. It is a beneficiary of the weakness in the US dollar, and continues to see good growth in profitability from the innovative and successful use of technology in the production process.
We believe that demand for its new mass-market tooth whitening product, Simply White, will be very strong. With the prospect of an increase in dividend and continued strong free cash flow we believe the company is an attractive investment opportunity.
Looking forward, the strength of the recovery is likely to be slower than experienced in prior recoveries. Consequently, this means a stock-picking focus on companies not dependent on a strong macro environment to support earnings growth.
We believe characteristics required to succeed in the current environment include dominant and growing market positions, lean cost structures, strong balance sheets and effective, adaptive business models. Our focus is on those few companies that can grow their sales and earnings in a low nominal economic growth environment.
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