It is often observed that active managers in the US find it difficult to consistently beat benchmarks and that, as a result, investors would be better off simply buying passive funds instead. In fact, the recent period has been a very solid environment for active managers of large-cap funds.
Many were able to exploit a convergence in valuation spreads giving a welcome tailwind to returns. As correlations fell, active managers did well and we began this year with high expectations that the environment remained constructive.
In truth, the first half of the year has been more challenging. Nevertheless, we believe the macro backdrop remains supportive. Many of the surveys for business spending and orders for capital goods look positive.
While investors are poised for the start of a rate tightening cycle, we expect the Federal Reserve to remain dovish and for interest rates around the world to stay at historically low levels.
Much has been made of the poor weather at the start of the year in the US and its impact on data, which we expect to show material improvement. In fact, GDP growth numbers for Q1 in the US have been revised upwards and in Q2 the US economy grew at an annualised 4%, shrugging off the cold start to the year and expanding well above market expectations. The stronger-than-expected rebound highlights just how distorted the first quarter figures were by one off events.
The Fed remains focused on jobs growth but we expect the labour market to continue to recover and, together with a continued recovery in house prices, help support the confidence consumers need to go out and spend. US car sales, for example, are at their highest point in the current cycle.
This confidence is further supported by the positive returns investors experienced from the US stock market last year, further underpinning the important wealth effect. Consumer confidence in July was in fact at a new post-recession high.
There does seem to be a small pick-up in inflation, indeed the Fed has noted that the downside risks to inflation persistently running below 2% are diminishing. Importantly, Janet Yellen appears to have garnered credibility quickly from the market in her new role as Governor of the Federal Reserve and, as a result, the gradual reduction in asset purchases to $25bn has not seen a repeat of the disorderly reactions experienced in financial markets last year when former Governor Ben Bernanke first mooted a withdrawal of stimulus.
Finally, with the S&P trading near an all-time high, it is crucial that companies’ earnings continue to meet expectations.
Q1 earnings came out better than expected and the signs are that the Q2 earnings season is also on track to beat market expectations.
Despite a more challenging environment and a significant rally in 2013, so far this year US equities have continued to reward investors. We are maintaining healthy exposure to the region with a continued focus on active stock pickers which employ fundamental research to identify companies that are well positioned to deliver earnings growth ahead of what the market has priced in.
