US most likely to deliver the best returns

Global investors have shrugged off concerns about high valuations by picking the US as the region most likely to deliver the best investment returns in the next three years.

According to a survey from Create-Research for Principal Global Investors, the US beat close competition from African frontier markets and Asia (excluding Japan, China and India) to take the top spot.

Out of the more than 700 groups that responded to the survey, managing more than $29.7trn (£17.5trn) in assets, 47 per cent thought the US would deliver the best returns in the next three years.

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A reasonable proportion of respondents thought Japan, western Europe or China would deliver the best returns, but there was a considerable lack of confidence in the rest of the ‘Bric’ economies, with Brazil, Russia and India all languishing near the bottom for expected returns.

The enthusiasm for US equities comes in spite of the market significantly outperforming global equities since the financial crisis and looking highly valued on certain metrics.

The S&P 500 index has generated a total return of 120.4 per cent in the past five years, compared with an 89.3 per cent rise in the MSCI World index, according to data from FE Analytics.

And the Shiller p/e ratio, which measures the price of companies divided by the average of 10 years of earnings, adjusted for inflation, currently stands at 26 for the S&P 500, which is much higher than the long-term average.

The US also suffered its first quarter of economic contraction for three years in the first quarter of 2014, as the country’s GDP shrank by 1 per cent on an annualised basis following a particularly harsh winter.

The high valuation of the market has led to some investors taking a negative view of US equities, such as Investec Asset Management’s Alastair Mundy, who has a 10 per cent short position on the S&P 500, a bet that will generate returns if the market falls.

But the report suggests such views are in the minority, and a large number of investors are still positive on the US.

Kully Samra, managing director of Charles Schwab UK, pointed out that while US equities may look expensive on a Shiller p/e basis, when one looks at forward earnings, the US has a p/e ratio of 15.5, only slightly above the average of 15.

He said while this shows the market is not cheap, it seems “fairly balanced”, adding “in a bull market, valuations can remain stretched for a long period of time”.

Mr Samra said the summer months “tend to be weaker” for markets, a trend that could be prolonged by the US mid-term elections later this year.

But he said all the leading economic indicators for the US show that the country has bounced back from a weak first quarter and is ready once again to grow strongly.