Mary Chris Gay: Why we see 15% upside for US equities

Mary Chris Gay, co-manager of the £52m Legg Mason US Equity fund with Bill Miller, forecasts a rally of up to 15% in US equities by the end of 2012.

She is confident the US will prove the strongest of the developed markets in 2012, barring an extreme extraneous shock.

Already, US equities have made their strongest start to a year for a quarter of a century, according to Bloomberg data.

"From a market standpoint, we would not be surprised by a 10%-15% up-year for US equities and given that we are already up 4% that implies some volatility," Gay said.

"A lot of the data has come out much better than expected, reflecting the high level of pessimism. But what underpins our outlook is valuations which are at low levels, especially for large caps."

Gay acknowledged the fact 2012 is an election year, which could produce some uncertainty for markets, but said she did not expect this year's US elections to be typical.

"We do not believe this will be a typical election cycle as it has been overwhelmed by the strength of the US economy and we are surprised at how strong the prospects will be," she said.

The Legg Mason manager sees US financials as attractively valued and has 20% exposure in her portfolio to the sector. She owns JP Morgan and Citi bank, which she likes because of its exposure to emerging market growth. However, Gay sold out of Bank of America last July after Standard & Poor's downgraded US debt.

"Changes made internally within US banks, in terms of quality and standards, have not been appreciated by the market and that is why they are trading in mid-single digit multiples. We think they reflect the best opportunities for the long term," she said.

She added price and value within the US stock market are often uncorrelated in the short-term.

"Macro distractions can cause the price to move around a lot but value tends not to change," she added.

Gay also sees companies in the US healthcare sector offering robust dividend growth and owns Pfizer, Abbott and Johnson & Johnson.

She has reshuffled her portfolio in recent months, adding to her positions in  energy, industrials, consumer stables and indirect exposure to housing.