US equities in 2014 had an outstanding year, with the MSCI North America index rising by 18.86 per cent, more than seven percentage points higher than the performance of the MSCI World index.
In addition the S&P 500 index rose by an even more impressive 20.02 per cent last year, which compares extremely favourably to the disappointing 0.34 per cent fall on the MSCI Europe index and the 0.5 per cent rise from the MSCI United Kingdom index.
So what has been driving this performance? Lower energy prices certainly helped to boost consumer disposable income in the second half of the year, while rising employment, steady GDP growth and a stable transition into the tapering of quantitative easing all kept US markets moving upwards.
But the start of this year has been less positive. For the year to date to February 18 2015 the MSCI North America index has risen by in a reasonable 3.07 per cent, with the S&P 500 index rising by a slightly higher 3.13 per cent, according to data from FE Analytics.
But this compares unfavourably with the returns from the MSCI Japan index, which went up 6.94 per cent in the same period, while the MSCI Europe index that performed so poorly in 2014 has seen a reversal in fortune with a rise of 5.35 per cent. This is in spite of eurozone infighting sparked by a new Greek government and continued conflict in eastern Europe.
Tony Dwyer, US strategist and senior managing director at Canaccord Genuity Wealth Management (CGWM), notes: “We have been expecting a first-quarter 2015 correction in the S&P 500 index as it becomes more apparent that the Federal Reserve would likely raise rates at the April Federal Open Market Committee meeting. That anticipated correction is likely being pulled forward by the free fall in energy and its impact on the global financial markets.
“We believe that the equity market continues to be driven by [an] earnings-per-share direction, which should remain positive for years to come as low inflation gives the Fed room to remain very accommodative. This will in turn cause the yield curve to be steep and the economy to be positive, in spite of international headwinds.”
Nigel Cuming, chief investment officer at CGWM, acknowledges the bull case for US equities is still easy to make, but he cautions: “The divergence in policies between the Fed and the ECB [European Central Bank] is likely to put further upward pressure on the dollar, which will adversely impact US competitiveness and probably US exports as well.”
He continues: “The recent reporting season has shown how badly bank earnings have been. [Add to that] rising compliance costs and with the energy sector earnings likely to be in free fall in 2015, the overall earnings outlook for the US market is not that attractive in real and relative terms.
“The market will need a huge consumer-led boom on the back of lower oil prices to enable it to make significant further progress.”
Meanwhile Richard Nackenson, manager of the Neuberger Berman US Multi-Cap Opportunities fund, suggests reasonable stock valuations and strong corporate fundamentals mean US equities remain a sound long-term investment.
He explains: “The ongoing growth in the US economy is translating into strong corporate earnings and cashflow. Earnings are expected to increase for all sectors of the S&P 500 in 2015, except energy, which has been impacted by the decline in commodity prices. Excluding the energy sector, S&P 500 earnings are expected to increase nearly 12 per cent.”
Within the IA North America sector, performance in 2014 ranges from the high of the Janus Opportunistic Alpha fund return of 26.67 per cent to the lows of the 4.35 per cent generated by the CF Richmond Core fund.
Roughly half of the top-10 performing funds in the sector last year are products with perhaps a wider remit, with names including the terms ‘opportunistic’, ‘special situations’, ‘strategic’ and ‘unconstrained’. This suggests the ability to move freely around the US market has proved beneficial for managers.
Mr Nackenson adds: “As we continue into the sixth year of economic recovery in the US, we expect divergence among investment styles. This presents both opportunities and risks for investors.”
Nyree Stewart is features editor at Investment Adviser
