Investing in the US - February 2012

Published by FTAdviser | Feb 20, 2012

Following a near global financial meltdown, corporate America is in strong health, the US economic recovery is gaining momentum, and US stock valuations are looking attractive.

However, in spite of the increasingly attractive valuations, it is questionable whether markets will remain patient.

It is equally questionable whether all European constituents can actually agree on steps that will convince markets that their policy is finally ahead of the curve.

Clare Hart, portfolio manager of the JPM US Equity Income fund, says: “Looking at the US specifically, a turn in sentiment led US equity markets to rally sharply in the fourth quarter of 2011, allowing the S&P 500 to finish the year in positive territory.

“Because of this, the US was one of the best performing markets, having outperformed the MSCI World (ex-US) index, as well as emerging markets, during the quarter.”

With the presidential elections scheduled to be held in November 2012, political risk remains a key factor, particularly given Washington’s stalemate last year and its impact on investor confidence.

That said, US equity markets have historically performed well in an election year, and it is possible that Obama will release a raft of stimulus measures in the lead up to the polls. This could provide further impetus to the market in 2012 – as Simona Stankovska explores in her feature on the impact of US elections on stockmarkets on page 36.

Bob Doll, chief equity strategist for fundamental equities at BlackRock, expects that US equities will achieve a double digit percentage gain in 2012, as multiples rise modestly for the first time since the recession.

He says: “After contracting by roughly 15 per cent in 2011, valuations will expand in 2012 as confidence improves on the back of acceptable, non-recessionary economic growth along with continued low inflation and interest rates.

“Should we see the sort of ‘muddle-through’ environment we expect, that should be enough to bolster investor confidence, resulting in an inflow into equities.”

He believes that with reasonable earnings growth and cheap valuations, US equity markets should outperform non-US markets for the third year in a row – with a caveat.

“Emerging markets lately have significantly underperformed, due largely to monetary tightening based on inflation concerns, leading to economic slowdown,” he adds.

“At some point, perhaps during 2012, emerging market equities will resume outperformance.”

At the same time, Mr Doll believes that the debt crisis in Europe and Japan’s persistent structural problems will hold those regions back relative to the world’s largest economy.

Jenny Lowe is features editor at Investment Adviser