US returns ‘low single digit’ at best in 2016 - Corcell

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US returns ‘low single digit’ at best in 2016 - Corcell

Low single-digit returns are the best investors can hope for from US equities next year, according to RWC’s Mike Corcell.

After a volatile summer, the S&P 500 index has returned 6 per cent for 2015 as of November 10, well below the 20 per cent 12-month return it produced in 2014.

Mr Corcell, manager of the $459m (£302m) RWC US Absolute Alpha fund, predicts more of the same in 2016, pointing to “slow and steady” progress coupled with “low single-digit returns”.

He said: “We are unlikely to see multiple expansion in the US. The election [next] November will cause some volatility, but a 4 to 5 per cent gain on the S&P would be good.”

Mr Corcell admitted he is a bit more cautious on the US market than in the past. “Corporate profit growth has been good, but it has been driven by margin expansion as opposed to revenue growth. Valuations are not particularly cheap.”

However, his long-short strategy has been allowing him to take advantage of the market volatility. During the mayhem of the third quarter the fund managed to keep its head above water, returning 4 per cent while the market dived 7 per cent, with both his long and short bets aiding performance.

He said: “In the long book, we were helped by strong stock selection, particularly around second-quarter earnings reports from Google and Amazon, the largest contributors in the quarter.”

In the short book, he benefited from negative positioning across a variety of sectors, including industrials, energy and leisure.

In the latter, he is notably shorting hotels, chiefly as a result of the rise of Airbnb, the short-term lodging service. “At peak times it has as much as 10 per cent market share in major US cities,” he added.

The real estate sector is also offering some attractive investment opportunities for the fund manager. “We are short apartment companies but positive for new home sales in the US.”

He said the “pendulum has swung too far the other way” on stricter lending criteria, leading to a lack of access to credit leaving people stuck renting.

However, Mr Corcell acknowledged that the stricter rules were a positive in the context of sub-prime mortgages, which nearly brought down the US economy during the financial crisis.

Better-than-expected October job figures have raised expectations that the US Federal Reserve will finally raise rates next month – a view to which Mr Corcell subscribes.

While the manager believes the economy is “not in bad shape but it is not great”, he does think it is about time the US has a more normalised interest rate policy.