With the exception of the very end of last week, US equity markets have for the most part continued to grind higher as investors have shrugged off the vicious collapse in crude oil prices and instead focused on increasing central bank accommodation and continued strength in the U.S. economy.
In our view, lower oil prices should also act as a beneficial tail wind for the US consumer. US families with income below $50,000 on average spent about 20-25% of their total household income on energy. Further, approximately 60% of Americans spent nearly 15% of their discretionary spending on gas. Lower energy bills should leave consumers with more dollars in their pockets to spend on goods and services, which should benefit overall consumer spending.
Certainly there are negative implications of declining oil prices. The share prices of energy companies have been hit by the decline in oil, for example, and there may be wider ramifications if this causes stress in the high-yield debt market. However, for many economies, the lower oil price is a bonus that should boost levels of consumer spending and economic growth.
Falling oil prices have benefitted the relative performance of our US equities dividend orientated strategy. Where we are seeking opportunities it tends to be in companies that lack direct exposure to specific commodities but instead integrated companies that own the entire supply chain and cycle of production.
JPM US Equity Income Fund is poised to benefit from a stronger US consumer, in that the fund is overweight the consumer discretionary sector. We tend to focus on companies able to provide return on capital and strong free cash flow. Typically these companies have been able to foster strong brand loyalty amongst customers and establish market leadership positions. These companies have also been able to grow their earnings, as reflected in the overall strong corporate earnings results generated by US companies.
Another area where we are finding interesting dividend opportunities is the US railroads sector. Here we are finding companies where investments in capacity and technology have helped them to generate industry leading margins. Some are undergoing significant efficiency improvements. Generally speaking they are trading on attractive valuations, offer a stable and growing dividend yield and are generating strong compound annual growth rates, suggesting that they can continue to deliver returns to shareholders.
Our main allocation and also our largest overweight remains in the financial services sector. Within financials we continue to favour those names that in our opinion are best positioned to navigate the interest rate and regulatory challenges in the sector. Our allocation within the sector is spread out across over 20 names encompassing such industries as regional banks, asset managers and insurers.
We continue to have significant exposure to the consumer discretionary sector, although we have reduced our overweight position in the last few months so that we are inline with our benchmark. We have selectively added to our utilities exposure in the last few months, and while our absolute weight is small at 7%, the sector is now our second largest overweight at approximately 4%. We continue to favour hybrid utilities that exhibit more growth potential versus pure regulated utilities.
Having a balance between companies that have an attractive yield and modest payout ratio has provided both a healthy dividend stream and capital appreciation. Our investment focus remains on finding high quality companies that are attractively valued and have sustainable dividend yields.