US equity markets can justifiably trade at record levels and push higher, according to M&G’s Eric Lonergan.
The manager of the £21m M&G Episode Defensive fund and co-manager of the £73.2m M&G Episode Macro fund said there were still areas of “extremely good value” in US equities in spite of both the S&P 500 and Dow Jones Industrial Average indices breaking through record levels this year.
“The S&P looks high but I would say that we are in a period where US equities should trade at higher multiples,” the manager said.
“The US economy is growing, so the market should be going to new highs. In real terms [after inflation] equity markets haven’t gone anywhere for some time.”
Mr Lonergan criticised the use of valuation metrics such as historic price-to-earnings multiples used to demonstrate that US companies are overvalued, emphasising that the current environment was very different to the 1950s or 1960s, for example.
He highlighted technology stocks and selected financials as areas of particular value.
“You can buy ‘money centre’ banks on very low price-to-earnings multiples with good dividend yields,” he said. “They are still being depressed by a number of factors but you could double your money in this area in three or four years.”
The S&P 500 index has gained 28.7 per cent in 2013, and the Dow Jones Industrial Average has risen 22.7 per cent. This compares with a 24 per cent gain from the MSCI World index.
The Episode Macro fund has a 10 per cent weighting to US equities through both stock positions and derivatives, while the Episode Defensive fund has 8.5 per cent invested in US stocks. Steven Andrew’s £214.4m M&G Episode Income fund has 17.2 per cent in the US, according to its September 30 factsheet.