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BlackRock says US fears are overstated

BlackRock says US fears are overstated

Fears about the US economy’s growth spluttering to a halt have been overdone according to the trio behind BlackRock’s Global Income fund.

After strongly outperforming in 2014, the US stockmarket has lagged other indices so far in 2015, with the S&P 500 index total return of 2.25 per cent trailing the 19 per cent return from the FTSE Europe ex UK index or the 14.1 per cent from the Nikkei 225.

This subdued performance has been delivered off the back of a series of economic data that failed to meet expectations.

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Investors have therefore become worried the economic recovery in the US, which had been seen as a cast-iron certainty in 2014, may not be as entrenched as first hoped.

Andrew Wheatley-Hubbard, co-manager of the BlackRock Global Income fund, said while he too was worried about US economic growth, the stockmarket had responded by punishing companies irrespective of whether they were affected by growth.

Mr Wheatley-Hubbard said the underperformance of the US market so far this year had given him the opportunity to buy companies he expected to do well, regardless of economic conditions.

“This year we have picked up some high-quality companies in the US where people have been concerned about growth, but we are happy with the business model in a slower-growth environment,” said Mr Wheatley-Hubbard.

The manager said the move into US stocks was not designed to significantly increase his exposure to the US. Instead, it was the result of a number of companies he had been watching suddenly having a more attractive valuation.

The new buys span a range of sectors, but have in common the ability to “generate cash in a sustainable way regardless of the macro environment”.

“The negative economic surprises this year have provided the opportunity,” said Mr Wheatley-Hubbard.

“We do not think US growth is falling off a cliff, but the people that were very excited about US growth last year have now become scared.”

The BlackRock fund, which Mr Wheatley-Hubbard co-manages with Stuart Reeve and James Bristow, is dominated by stocks in the consumer staples and healthcare sectors, which make up more than 50 per cent of the portfolio’s assets.

Both sectors have performed well in this low-yielding environment, with many investors attracted by their cash-generative abilities, resilience to economic turmoil and higher-than-average dividends.

This investor interest has pushed the two sectors up to high valuations, on a price to earnings (p/e), with the consumer staples sector in the US currently on a p/e of nearly 22x.

But Mr Wheatley-Hubbard rejected claims the sectors were expensive, saying his preferred method of valuation, which looked at discounted cashflow (DCF), threw up a different picture.

“DCF for most staples is broadly fair value and I am happy to pay fair value for stocks able to generate a lot of cash,” he said.

“People say sectors such as healthcare and staples are expensive, but compared to history they are not expensive relative to the market.”