Joking aside, it appears that US equities really do appear to have the X factor, though I’d think again if you believe markets will only head in, ahem, one direction.
As appears to be the case every couple of years or so, consensus has again turned very much in favour of North America. But why? Is it really that valuations are looking so attractive or, with Europe in a mess and emerging markets having disappointed last year, is it more to do with a lack of options elsewhere?
A defensive play
OPM Fund Management is one of the firms that has recently reduced a previous underweight to the US via investments in funds from the likes of JP Morgan, Legg Mason and Aviva. Chief investment officer Tony Yousefian makes the case for the US as a defensive play given that it usually performs better, relatively, when markets are down.
For now though, markets are up and Yousefian is looking at improving signs from the housing market and better employment figures as indicators of optimism.
He says: “The most important skill is to look beyond the headline figures. We have seen that not only is the overall employment picture improving, but it is improving across most of the major sectors. Manufacturing is an important area which has improved, helped by loose monetary policy and the weak dollar.”
Andrew Harradine, head of long only manager research at EFG Asset Management, tells a similar story: “Clearly a lot of the unemployment in the US was related to the construction sector and as we see housing improve that will also impact the banking sector too.
“We have started to see more loan growth come through in the US of late which is good for US financials. Certainly as we look at our economic growth forecasts for US growth versus other nations and regions, we feel more comfortable there.”
However, it’s important not to get carried away after all market buoyancy in January and February doesn’t necessary usually carry on though for the rest of the year. Harradine also points to the poor performance of US funds last year – the worst year for active managers since 1998 – where the only strategy that really brought success was one which focused on quality dividend payers.
No guarantees
Things have been undoubtedly looking better for value-oriented stock pickers this year, but there can be no guarantees that this will continue. The aggressive cost cutting and low capital expenditure that has contributed to the rally in the States could quite rapidly run out of steam.
As Ilario Di Bon, head of global equities at Alliance Trust Investments, recently commented: “The improvement in economic momentum could gain further ground. However, it is imperative, for it to be sustainable in the medium term, that the US address their multiple structural imbalances associated to excessive debt levels of the private, financial and public sectors. 2012 being a presidential election year might indicate the future direction of the country’s fiscal and financial discipline.”
That last point is an important one – it’s far less likely for the current administration to enforce unpopular policy decisions during an election year, and there remains a risk that some nasty surprises could be swept under the carpet only to re-emerge at a later date. As any honest former teen heartthrob will tell you, the good times don’t last forever.
