North American fund managers argue that US corporates offer the opportunity to benefit from rapidly growing emerging markets and thereby offer the best of both investment worlds
The US is fast being left behind in the dust created by China’s rapid rise both in market terms and in its popularity as a regional fund choice for UK investors. For the past several years, even with dramatic falls in its stock market, investor interest has centred on the Eastern part of the East-West equation.
In comparison to China, a mature western economy seems dull. US corporates have also been under criticism in the wake of its sub-prime crisis which sparked the worldwide credit crisis, while its economy remains weak from its fall out.
With all this going on it is little wonder the world’s largest market is overlooked. Yet North American fund managers say the US market is not as dull as it seems and there remain plenty of growth opportunities in its companies as they are among the best positioned to take advantage of increased globalisation. Instead of an either China or US scenario, managers claim investors can get exposed to China growth through the strength of US corporate names.
Tom Walker, manager of Martin Currie North America, noted there’s been a lot of push back on the US, calling it ‘the unpopular superpower.’ “Compared to emerging markets it may not look as sexy, for the past 10 years it has been one of the worst performing markets in the world and its economy and currency have underperformed.” But he disagrees these negatives should hold the US back and feels there are a number of characteristics about the market which should appeal to investors. With talk of the market’s lost decade, Walker pointed out the US started the decade with overvalued tech companies featuring high valuations. Today the market is considerably less expensive than it was, providing greater opportunities for investors this decade.
Bill Miller, the chairman and CIO of Legg Mason Capital Management is bullish on the US market outlook as a whole at the moment and believes US GDP growth could surprise this year, which has the potential to lead to a 20% uplift in the market.
According to Miller, US stocks are delivering earnings that are consistently above expectations. He pointed out that since 1871 there have been 14, 10-year periods when stock market returns have been negative, including the past decade. “In every one of the previous 13, the subsequent 10-year returns have exceeded 10% after inflation, or much higher than the long-term average real return of 6.66% and more than double the return of government bonds.”
Sebastian Radcliffe, manager of Jupiter North American Income, said despite the recent equity rally, valuations in the US market remain reasonable and, given the scale of ongoing cost cutting, earnings growth could surprise once revenues begin to expand. “The US market continues to offer excellent opportunities to invest in solid blue chip companies with strong balance sheets at low valuations.”
Innovation and diversity
Walker, who prior to running North American equities used to run Far East money, said the region has some of the best companies in the world, which fuelled his move away from emerging markets.
Walker is also an advocate for US large caps and the strong brand names. His current focus is on the quality end of the US market, leading him to those companies with dominant global names.
China may be full of growth opportunities, he said, but the US is not without innovation through a number of sectors. Noting the dominance of companies such as Microsoft, Intel and Google, he said US innovation isn’t just limited to the tech sector the US is also leading the way in sectors such as oil services. There is also the diversity of America, noting its companies have tentacles everywhere, which can not be said of other countries.
Miller is also playing this theme, believing US mega-caps are best-placed to exploit growth in emerging markets in coming years, especially those that carry favoured big brand names. “Their non-US earnings mean that they will grow faster than their smaller counterparts while rising consumer demand in China, which the Chinese government is encouraging, will also provide some support for the dollar if it translates into higher demand for US exports,” he said.
Euan Sanderson, senior vice president, US equities at Standard Life Investments, noted much attention has been paid to retail sales figures over recent months, as investors scrutinise the marketplace for evidence of a sustainable economic recovery. He believes there are signs of resilience in the spending habits of high net-worth individuals. As such, he is favouring the high end of the consumer discretionary market through holdings in brands such as art auction house Sotheby’s and luxury department store Nordstrom.
One major concern is protectionism. Walker agrees protectionism presents a threat but he noted it is a long term risk for all regions. He doesn’t see the US as being more vulnerable to this trend than other regions, noting different markets have different pressures. “The US has more brands so you could argue the reverse,” he added. “There is a broad acceptance that globalisation is good for everyone so it helps to keep protectionism down.”
