With much media attention and speculation as to what the US debt crisis will mean in the long run, the US stock market has been a volatile place to be.
Funds in the IMA North American sector show the effects of the barrage of bad news the US has suffered with just one portfolio in 98 achieving a positive return in July.
According to FE data the tiny $3.4m, mid-cap focused CF Greenwich fund gained 1.62% in July while the rest of its peers were flat or in negative territory. Over three and six months, most funds also lost money but over the stronger 12 months to 1 August all show gains.
Blackrock’s Bob Doll notes as the US’s debt crisis escalated through July, market volatility increased. “Investors loathe uncertainty and the fixation over the debate in Washington has been enough to disrupt markets.”
Doll points out that even with a resolution to the crisis, it doesn’t mean US markets will calm. He says credit rating agencies may still go ahead and downgrade US debt and it’s unclear how investors will respond if this were to happen.
It’s not as if the debt crisis was the only drama with which US investors have been contending. Recent GDP figures were much lower than many expected and unemployment, while falling somewhat, remains high. Even now M&G predicts the US is headed for recession, although Doll disagrees.
US corporates better than economy
With all this bad news, the case for investors to look to the US market seems relatively weak. Still, as has often been said of the UK, the state of the economy is not indicative of the outlook for companies on the stock market.
Neptune’s US Opportunities Felix Wintle makes the same point. “We’re not buying units of the US government or GDP, we’re buying shares in US companies and a lot of the debt issues in America don’t relate to corporates. Actually corporate America is in very, very good health.”
Doll makes a similar assertion, noting corporate earnings are showing resilience in the face of all that has been happening in the economy. “At this point, approximately two-thirds of companies have reported second-quarter earnings, and over 70% have delivered results that were ahead of expectations.”
US stocks have been stuck in a fairly narrow trading range, making it difficult for managers to find opportunities. But Doll thinks now that some resolution to the immediate economic woes is providing clarity, investors may once again turn to examine equity fundamentals.
Axa Framlington American Growth manager Stephen Kelly is also fairly positive on the fundamentals of US plc. He says the current market weakness should be viewed as a buying opportunity ahead of what he expects will be a time of healthier economic numbers in the second half of the year.
Fund choices
However positive managers’ outlooks for US companies remains, the bad press of recent events means UK investors are unlikely to venture into US funds any time soon. The IMA’s latest sales data shows the North American sector was the worst selling area in May and it’s likely June and July’s figures will show a similar trend.
In the meantime, macro strategies, Japanese equities and bond sectors having been benefiting from the upset over the sovereign debt crisis in Europe and the US.
Within the Absolute Return sector, those with a macro strategy are coming up tops over this more recent volatile period. Over July the best performing areas of the IMA fund universe were Japanese Smaller Companies, on returns of 3.45%, followed by UK Gilts at 2.98%.
