US dubbed ‘new emerging market’ as investors snap up shares

Leading fund managers are favouring US equities over markets including China and Europe as the appeal of owning dollar assets helps spark a shift into the world’s largest economy.

Managers running global funds – including Bill McQuaker at Henderson Global Investors and Neptune’s Robin Geffen – have been increasing their allocation to US equities despite cheaper opportunities elsewhere.

The move comes following a strong start to 2012 for the S&P 500, which has shot up since the start of the year, gaining 4.36% alone in January. This was the highest January return since 1997 when it rose 6.13%, according to S&P Indices.

There was also a rise for the Dow Jones Industrial Average, which advanced 4.25%
over the same period, leaving both within a whisker of 52-week highs.
While January’s gains for US shares could prove to be short term, historical data suggests a positive start to the year could lead to gains from the S&P 500 over the whole of 2012.

During the past 16 years when the S&P 500 climbed in January, it has gone on to have a positive full year on 13 occasions, or 81.25% of the time. Solid GDP growth figures and a commitment by the Federal Reserve to keep rates on hold until the end of 2014 have boosted shares.

The appeal of owning dollar assets against a backdrop of global uncertainty has also benefitted the equity market, especially as investors seek alternatives to what are perceived as overvalued treasuries.

Analysts warn US shares are still vulnerable to a short-term correction if investors take profits, an outcome made more likely if there is another twist in the unfolding sovereign debt crisis in Europe.

However, fund managers are backing the region to continue to perform well compared to other areas. McQuaker, running a number of funds including the top-performing £680m Henderson Multi-Manager Income & Growth fund, said: “The world continues to have its troubles, and against that backdrop the US is a safer place to be.

“You are buying assets denominated in dollars and if there is a downturn then you have got that dollar safe haven exposure.”

McQuaker conceded there is a risk investors buying in now could be too late, following strong gains since the start of the year. However, he still favours US equities compared to cheaper markets – primarily China and Europe – because of the risks they face.

“Chinese and European markets look cheaper on a valuation level, rather than necessarily more attractive, whereas in the US I do not see a valuation impediment at these levels,” he said.

He added the US is in line for a manufacturing ‘renaissance’ making it the ‘new emerging market’. “The US has put itself in a wonderful position with regards to its currency and its labour costs, and in some sense the US is the new emerging market.”

Neptune co-founder and fund manager Robin Geffen is also positive on US shares. The manager of the £1bn Neptune Global Equity fund has upped his US exposure, taking it from 30% at the end of November to 34% by the end of last year.

This was the largest US weighting for the fund in its ten-year history, although it remained underweight compared to the benchmark. Geffen is backing the region to outperform, expecting it will escape recession, unlike Europe.

He said: “The scene is set for a year of good, broad-based equity returns provided the euro leaders push ahead with a joint fiscal arrangement with real ECB support and avoid a fully fledged banking crisis.”

“In this scenario the US is not vulnerable to fall into a recession and the emerging market economies can look after themselves so long as the advanced world is not in a state of acute financial crisis.”

Julian Chillingworth, CIO at Rathbone Unit Trust Management, is also expecting US equities to perform well compared to other markets. “We remain confident US equities could still outperform.

The Fed’s communique on the direction of interest rates should also help to steady expectations. The only caveat (apart from Europe) is the direction of the oil price. As long as this does not spike, US consumer sentiment should remain positive.”