Your IndustryAug 11 2014

Investing in the US - August 2014

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Approx.60min

    Investing in the US - August 2014

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      Introduction

      By Ellie Duncan
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      With second-quarter numbers and corporate earnings in full flow, investors are able to build a better picture of where the region is headed in the second half of 2014 and when, if any, surprises are likely to come.

      Perhaps the biggest sign yet that the US is well ahead of the UK and the eurozone in terms of its recovery is its second-quarter growth figure. The Commerce Department revealed GDP growth of 4 per cent in its first estimate when economists had forecast 3 per cent. This comes after a significant contraction in the first quarter of 2014.

      Russ Koesterich, BlackRock’s global chief investment strategist, suggests a “decent” second-quarter earnings season lends support to stocks, and notes that roughly 80 per cent of companies reporting earnings in the US have beaten analysts’ profit estimates.

      He highlights that so far strong earnings have been reported by what are considered key companies, including Facebook, Microsoft and AT&T.

      One characteristic that has dominated the US market in recent months is the low level of volatility. This is particularly notable amid the rising geopolitical tensions elsewhere in the world, including the Middle East and Eastern Europe.

      Kully Samra, managing director at Charles Schwab UK, says it is difficult to comment on geopolitics, but acknowledges the level of stability in the US.

      “The market has continued to trend upwards and when we have seen it come down based on what’s going on it’s only come down a little bit,” he says. “I think that’s surprised everyone because ultimately most markets are integrated quite closely.”

      But Wouter Sturkenboom, investment strategist at Russell Investments, warns on valuation levels in the US.

      “The market has done really well at very low levels of volatility, so there’s been a really strong momentum-driven market that has been pushing higher and higher. It’s been great for investors and that’s happening against a backdrop of continued economic recovery,” he observes. “The recovery has continued; it hasn’t experienced a double-dip recession like the eurozone. That’s the strength in the US but the weakness is that markets are at very high valuation levels.”

      Mr Sturkenboom is therefore wary of the current US valuation story and is looking for validation from earnings and GDP growth numbers.

      This could be why North American equity funds saw retail sales outflows of £140m in June this year. Are investors losing confidence in the region?

      Mr Samra, however, remains positive on the outlook for the US and its ability to deliver returns to investors. In fact, he says investors are questioning where else, other than the US, is investable in the current climate.

      “While our clients are US focused they have an international outlook and everybody seems to be scratching their heads as to where to invest besides the US,” he remarks. “We’re all trying to find yield somewhere. We’re not finding it in other countries so everybody keeps circling back to the US and we think that’s a theme that will continue for the short to medium term.”

      Ellie Duncan is deputy features editor at Investment Adviser

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