Target US equities able to endure ‘external pressures’

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Target US equities able to endure ‘external pressures’

Investors targeting US equities should focus on areas of the market that are unaffected by the strength of the dollar, top-performing manager Evan Bauman has said.

The manager of the $4.8bn (£3.1bn) Legg Mason ClearBridge US Aggressive Growth fund said many of the most attractive sectors in the US equity market were barely affected by the stronger dollar.

“Areas such as cable and domestic healthcare companies are virtually immune to any headwinds from the dollar, so a lot of names are protected and should continue to be successful regardless,” Mr Bauman said.

Rather than panic over the impact of a firmer dollar, he said investors should concentrate on those names that had the ability to grow earnings and cashflows.

“We try to pick companies that can withstand external pressures,” he said.

Mr Bauman and his team also favour energy names following sharp falls in commodity prices, with some energy prices trading around 50 per cent lower than a year ago.

“The energy sector has been the focal point of our portfolio in the past nine months, and we have increased positions in our existing holdings,” he added.

“Valuations for some energy firms are the cheapest in history.

“There have been predictions from energy chief executives that as much as a quarter of the industry won’t exist in two years, and if that came to pass it would mean bankruptcies, as well as big cutbacks in production, capex and spending.

“But ultimately it will lead to a much healthier supply/demand dynamic for the survivors.”

In terms of the dollar trade itself, he said much of the greenback’s rise had already been priced into equity valuations and so should not have a long-term impact on the stockmarket.

If a currency becomes too strong, it can become an issue for companies domiciled in that country as exports become more expensive.

“We don’t typically have significant macro views unless we think they are five- to 10-year trends, and a lot of this story has finished now,” Mr Bauman said.

“Dollar strength is something that has impacted earnings to this point, but the dollar trade is now pretty crowded.”

The manager’s fund was the second-best performer in its US fund peer group across the past five years with a return of 130 per cent in sterling terms, while its performance in the past three years was top quartile, data from FE Analytics shows.