InvestmentsFeb 18 2014

News analysis: Bulls outweigh bears on US equities

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Ian Heslop, manager of the Old Mutual North American fund is similarly bullish. He believes that although the forward price-to-earnings ratio – a measure of a company’s stock price against its expected earnings – on the S&P 500 is now about 15.5x, the market is not necessarily expensive.

“With economic expansion and some improvement in margins, it’s reasonable to expect earnings growth in the high single digits,” he says. “The risks are that the Fed messes up, the summer numbers are too soft or too slow, and that inflation rises.”

Jeff Morris, Standard Life Investments’ head of US equities, expects increases in merger and acquisition activity, as a result of the slow growth economy and low levels of corporate financial leverage.

Mr Morris says: “The positive reaction in the share price of some acquiring companies should serve to encourage more deals. We expect that 2014 will be more of a stockpickers market, rather than a rising tide that lifts all boats.”

Andrew Lebus, manager of the Pantheon International Participations investment trust, cites cheap energy prices as another positive factor. “They have provided a significant boost to US businesses and consumers, helping to create an attractive investment backdrop for the US industrial sector, in particular,” he says. “Signs that the US is considering the merits of exporting shale gas may also have a beneficial impact on the economy.”

Mr Lebus also thinks the US could benefit from the financial and social reforms in China, which continue to shift its economy from an export-led model to one oriented towards domestic consumption.

But risks remain, not least from internal politics, as another round of debt ceiling negotiations could rattle the markets.

The US shutdown in October 2013 took an estimated $24bn out of the economy, or 0.6 per cent from GDP growth in the final quarter. Mr Lebus warns: “The impact on economic activity may have been marginal, given the acceleration in the underlying economic growth in the US, but the impact on sentiment was significant. The message is that the US system faces crisis every time an important economic or political decision must be taken.”

Another risk is that interest rates might rise earlier than expected. With the unemployment rate having fallen to 6.6 per cent, only just above the Fed’s 6.5 per cent threshold for considering a rise in interest rates, all eyes will be on new Fed chairwoman, Janet Yellen, to see whether she gives any reassurance to the markets that interest rates will stay at close to zero this year.