make sure clients in next record breaking

Much has already been said about the Dow Jones Industrial Average reaching an all-time high earlier this week, but less about the hidden forces at play which could help you identify the next stock market to benefit from such a surge.

make sure clients in next record breaking


Despite the fact it is an index tracking only 30 US-based companies the feeling is that it marks a tipping point of some sort.

Some investment professionals may well take it as a signal to pull back US exposure, following a good run since mid-November when consensus judged the fiscal cliff fears were overblown.

But others will view it as confirmation of their conviction in the market.

Team U.S.A

Multi-managers who have recently been on trips stateside have come back with overwhelmingly positive views.

David Coombs, head of multi-asset investments at Rathbones Unit Trust Management, says there is growing evidence of something significant happening that could well challenge the west to east investment theme that has anchored consensus wisdom over the past ten years.

In particular the ‘rust tiger’ states in the Midwest and north-east of the country – including Illinois, Ohio and Michigan – have put in impressive manufacturing gains.

The shale gas success story and the impact it could have on US growth is well documented, but Coombs goes as far as to say the reductions in energy costs are a game-changer and catapult the US up the scale in terms of competitiveness.

To reflect his opinion on the US Coombs is adding a growth bias toward US equity exposure in his multi-asset portfolios. He thinks the stock market is fair value and in such a cyclical, below-trend recovery companies that grow will demand a premium rating.

Constructive growth

Meanwhile, over at Aberdeen Asset Management, senior portfolio manager in the multi-manager team, Robert Bowie says he is constructive on US growth.

Having recently completed a research trip across the pond he said the recovering US house market and resolution around US tax policy were important drivers in the country’s recovery.

Indeed, even the Federal Reserve’s comments about an exit strategy to quantitative easing have not dampened his enthusiasm: “It was only recently that the Fed targeted a reduction in unemployment with monetary policy. We therefore expect an accommodating stance to prevail.”

The US equity market rally in the past few months, has discounted much of the good news, Bowie concedes, but the US economy is in better health relative to Europe and the UK with a trajectory which appears to be improving.

Within the Aberdeen multi-manager funds the team have been relatively fully-weighted towards US equities and while it believes the markets may pause in the near term, core positions in Findlay Park American and Threadneedle American Extended Alpha are being retained and all US positions remain in active managers. Although if you are not one of the lucky ones to have access to the soft-closed and award winning Findlay Park fund it is hard to think of someone with a more consistent track record to substitute. 

US make way for… Japan

Elsewhere, however, Coutts & Co’s CIO Norman Villamin sees better opportunities in Japan and even the UK.

He says a few months ago he was interested in the US and then at the end of the year his favoured market became Japan and next up UK equities could prove their worth.

His changing views on these markets have come in tandem with their policy adjustments, with the US first out of the blocks when it came to accommodative monetary policy, hence it is the most prominent and earliest in benefiting from it.

"If you go back to September that is really when Ben Bernanke, chairman of the Federal Reserve, kicked off this round of QE and then the politicians kicked the can down the road on the fiscal cliff. Growth and earnings were allowed to come through, and if you extend that idea to Japan, it started a little bit later in October.

"We think that lines up the Japanese economy for some types of earnings and economic surprises going forward."

It is as well to remember that Japan as a stock market has not done to shabbily in the past few months either, charting some impressive gains since the third quarter of last year. But while the Yen has depreciated by 20% in relative terms the market rally has been modest.

Villamin says Japanese equities have not seen the earnings upgrades coming through and that is what he expects to come through next. 

Take advantage of currency wars

The UK authorities have been less explicit about a policy of currency devaluation but it is going on. Since the start of the year sterling is down 6% to 7% on the dollar.

The term ‘currency war’ has been used in an inflammatory way since the Brazilian finance minister Guido Mantega claimed it had started in September 2010. But as Villamin illustrates here, spotting a trend of currency devaluation leading to earnings growth and thus strong stock market performance could be valuable for clients’ portfolios.

Bernanke was asked about currency wars recently and said he did not think there were any. In summary he said countries were trying to address shortfalls in domestic demand and using policies with an outcome that devalued currencies. So with a tacitly supportive stance from Bernanke, the door has been opened for other central banks to follow suit.

Villamin has his clients’ Japan exposure hedged back into dollars and says when investing abroad wealth managers have to make two calls, whether they like the asset and whether they want exposure to the currency.

"Investors need to think about currency as something to protect against but also an opportunity to drive returns, looking back over the past few years it hasn’t been used that way."

How have you responded to record levels on the Dow Jones and claims the currency war is heating up? Use the comment box below…




Latest Stories