INDUSTRY VOICE: 2018 has been a popular year for US equity, with almost €18bn collected in US ETFs. And even at this late stage of the economic cycle, we at Lyxor still see opportunities. Keep reading to find out how the economic cycle might inform your American equity choices
Why there US could go further
There's little doubt Trump's belated, but unprecedented, fiscal stimulus should foster more inflation at a time the economy is running at or above full capacity. Strong top-line revenues and margin expansion (as well as share buybacks) have bolstered the earnings-per-share outlook for corporates, while recovering capex and the associated upturn in productivity could help mitigate the negative effects of rising wages. All of which suggests there's some further upside ahead. Little wonder investors are still being drawn to the US, despite the unpredictability of the administration on the Hill and the looming mid-terms.
That said, we do expect more volatility in the coming weeks, given the policy and political pipeline. We're expecting another rate hike later this month, after which all eyes will turn to the mid-term elections. Further trade tensions lurk.
Recent US ISM surveys have reached new cycle highs and the job market has remained strong, suggesting solid growth in the coming months. Outside the US, business survey results such as PMI manufacturing in emerging countries and Europe have dipped on the trade tensions, but they're still pointing to economic expansion. That could change should the trade war escalate or become more global in nature but we still think a negotiated settlement is ultimately more likely. In truth, a move from sporadic, temporary sell-offs into a lasting bear market requires a more meaningful, cyclical turn down - something we don't foresee just yet.
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Although every business cycle is different, they do tend to follow a similar pattern. Convention has it that when an economic recovery matures, the energy and materials sectors - which are closely tied to raw material prices - tend to do well. That's because inflationary pressures are building and demand for these goods is still solid. On the other hand, IT and consumer discretionary stocks tend to suffer because their profit margins are being eroded and investors are becoming more wary of luxury spending.
We're seeing some of this today in the US with the recovery now entering its dotage, but there are specific issues helping some sectors defy convention.
Of size, sectors and styles
When assessing US equity allocations today, you have to factor in the fallout from the fiscal push. It helped US corporates avoid typical late-cycle like slowing earnings growth and a squeeze on profit margins and also ensured a favourable environment for Financials and Technology, through deregulation and tax reform respectively.
Meanwhile, Trump's tax cuts should still stimulate additional profit growth for smaller companies, many of which benefit from a domestic bias to their business - making them slightly less vulnerable to the ongoing trade disputes.
Style-wise, we still favour growth given the importance of robust earnings growth and sustainable profit margins right now. Those tax reforms should continue to boost capex, cash repatriation and, ultimately, tech - a sector which currently represents around 30% of all US capex and around 40% of the Russell 1000 Growth Index.
Capturing opportunity with Lyxor
If you agree the US is a land of opportunity, look no further. Lyxor's US equity range opens up 14 possible routes to travel, across mainstream and more specific indices from just 0.04%. And because we've been managing ETFs in the region for over 16 years, and run over €8bn in assets, we may just be the guide you need.
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* Sources: Lyxor International Asset Management. Economic data as at end August 2018. TERs correct as at 11/09/2018, ETF flows data from Bloomberg, correct 14/09/2018
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