BLOG: is it the end of the seven-year bull run on US equities?
A year ago, I questioned whether the run could continue, driven as it had been in part by Quantitative Easing (QE), rather than fundamentals. It did. Over the past 12 months UK investors investing in the US market have enjoyed a 16% gain in sterling terms, while the UK market has fallen 5%.
However, currency counts: if you look at the data in dollar terms, the result is very different. Over one year, the S&P 500 is actually slightly down (-1.6%). So while the stock market has just about weathered the storms of the past 12 months, the weaker pound/strengthening dollar has given returns a significant boost for UK investors.
The question now is whether it’s worth investing in the market today. Overall I’m neutral on US equities. I wouldn’t suddenly pile all my money in now, but I won’t be selling either.
Four reasons to invest
1) Safe haven
In a world of uncertainty, investors tend to move to the strongest place. The US is arguably that place. The dollar is seen as a ‘safe haven’ currency and the economy, while not perfect, is arguably more solid than any other in the developed world right now.
2) The Fed will remain supportive
A second rate rise this year is now unlikely. No matter how much it may have wanted to continue on the path to ‘normality’, the Federal Reserve will be loathe to do it now that Brexit has increased global uncertainty. It’s also worth remembering that US QE stopped a long time ago, so if necessary, the Fed could restart its bond buying programme – a positive for equities.
3) Higher-yielding US treasuries
The 10-year treasuries are only yielding 1.46% today but that is significantly more than any other developed market government bonds – some of which have negative yields. They are also used as a ‘safe haven’ asset, adding some valuable down-side protection to portfolios. They would be vulnerable to a strong reversal in the £/$ exchange rate and also to inflation, but for now, they look attractive.
4) Plenty of choice
The US is full of exciting large and small entrepreneurial companies. It’s also home to a large proportion of the world’s healthcare and technology companies, many of which have products or services that are required, no matter how bad things get. With dividends also continuing to grow across pretty much every sector of the economy, there are still going to be investments worth making.
Four reasons to be cautious
1) Brexit fallout
While the UK accounts for just 3.9% of global GDP and 7.25% of the MSCI World, the fallout from our decision to leave the EU could have a much larger impact on the rest of the world. Bill Gross has even been reported as saying that there is a 30%-50% chance that the US will fall into recession as a consequence. This isn’t a trade issue; it’s more the fact that weaker sentiment and a loss of confidence could be the catalyst for some existing, underlying problems in the US economy to come to the surface.
2) November elections
Given Donald Trump is one of the contenders and the ‘anti-establishment’ vibe among the voters seems to be spreading, business, and therefore markets, are likely to be concerned about the possible outcome and volatility should be expected in the run up to November.
3) Sterling strengthens
If the pound strengthens significantly from here – which is a possibility considering how far it has fallen in the past few days and weeks – it could hurt UK investors in dollar-denominated funds in the short term. Any gains in the US stock market could be narrowed if the currency rises dramatically and any capital losses compounded. It is worth remembering that usually currency fluctuations are ironed out over time. It is only when we get extreme moves that it can have a significant impact on your investments.
4) Valuations remain high
Almost every chart you look at shows the US equity market is above its long-term average valuation. This suggests that, if you invest now, future returns could be low if these valuations don’t continue to rise. Recent company earnings reports have been poor, which doesn’t bode well for ongoing profitability.
Here are four funds to consider:
- AXA Framlington American Growth
- Brown Advisory US Flexible Equity
- Legg Mason Clearbridge US Aggressive Growth
- Schroder US Mid Cap.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services