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Boom time in the US: Is it a time to buy or sell?

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04/07/2014
Investors have decided to celebrate Independence Day by pushing the Dow Jones to its highest level ever.

In the end, all it took was a particularly buoyant employment report to push the market to unprecedented highs, but for investors it poses a dilemma: a time to buy? Or a time to sell?

The argument, long-term, for an investment in the US is – as the locals would say – a no-brainer. The US is the largest and most developed stock market in the world. It contains some of the world’s leading companies – imagine missing out on the growth of the next Apple, Microsoft, Coca-Cola or Nike. In technological advancement in particular, there are companies unmatched anywhere else in the world.

However, there are a number of challenges to investing in the world’s largest economy. The first is the active/passive problem. The US stock market is efficient – i.e. there are lots of people investing in US stocks, so any news about a company is quickly reflected in the price of shares. This has historically made it difficult for active managers to perform better than the major indices and has led many to conclude that an fund that tracks an index such as the S&P 500 or Dow Jones is a better option.

Equally, it undoubtedly looks quite pricey. In an ideal world, investors would always buy when a stock market is at the bottom, rather than when it is hitting new highs though this is difficult to do in reality. History suggests that there is less profit to be made at this point in the cycle but that could be said of a number of markets. The question is whether an investment in the US looks, relatively, better than elsewhere.

Those who believe there may be more juice in US stocks usually cite the higher economic growth rate and the greater potential for companies to grow their earnings. For example, Cormac Weldon, head of the US team at Artemis, says that falling energy prices, an improving balance of payments and a manufacturing renaissance should all act to support the US economy. The ex-Threadneedle star adds that valuations may look higher in the US market, but the prospects for corporate earnings are good. He also believes that the market looks good relative to other investments, such as corporate bonds.

David Coombs, head of multi-asset investment at Rathbones, agrees that the stronger growth prospects for the US justify the higher price tag and has an overweight position across all his funds.
Others are less optimistic. Jason Hollands, managing director, business development & communications at Bestinvest, says that, in general, he believes the US market has less capacity for growth from here and favours US equity funds with more of a value bias, such as the GAM Star GAMCO US Equity fund.

He says that for clients who like a little more excitement, Bestinvest is currently recommending the Legg Mason US Smaller Companies fund managed by Lauren Romeo. He adds: “The fund has had a relatively tough time in recent years as it only invests in quality smaller companies with robust balance sheets. However, QE created an environment where the rewards went to more speculative businesses carrying debt, as ultra-low interest rates and bond yields meant such businesses were able to refinance and reduce their debt servicing costs and thereby get an earnings uplift. However, as QE ends and policy normalises, we expect the market to recognise quality again and that should be reflected in this fund.” He also likes the Aviva Investors US Equity Income II fund, which has the added advantage of an income bias.

However, he admits that he tends to use passive funds for exposure to larger companies in the US: “US large caps have a reputation as a graveyard for active fund managers. The S&P 500 is a notorious index to beat and therefore we often suggest using passives to achieve exposure to US large companies. Our top choice for doing this is the HSBC American Index fund which has total annual costs of just 0.18% on share class C.”

Stephen Peters, head of investment trust research at Charles Stanley, believes the US is expensive, but there are still opportunities among US investment trusts. For core exposure, he likes the JPM American Investment trust managed by Garrett Fish for its pragmatic style. He believes the group’s US Smaller Companies fund is also worth a look. He also likes the Jupiter US Smaller Companies trust.

There will probably be better times to buy into US stock markets, but this may not trouble the long term investor. As always, if a stock market looks expensive, it can be worth drip-feeding money into the market, so that there are a range of different buying points. However, what is certain, is that no investor should neglect the US altogether.

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