US and EM equities forge ahead in 2016

This article is part of
Half-Year Review – June 2016

US and EM equities forge ahead in 2016

US equities appear to have been the most consistent asset class in terms of performance and finding favour among investors by the midway point of the year.

The S&P 500 index is up 5.3 per cent in sterling terms this year as of June 15, data from FE Analytics shows. That said, it was European equity funds that were the most popular among UK investors at the start of 2016 with net retail sales of £291m in January, making it the best-selling region in the month.

Meanwhile, North American equity funds recorded sales of £230m in the same month, which the Investment Association (IA) points out is the highest since July 2013.

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The popularity of North American equity funds has continued, with figures from the IA showing it was the second highest-selling region in April with net retail sales of £44m, albeit some way behind the £548m clocked up by global equity vehicles. This suggests investors are trying to hedge their bets on how regional equity markets will perform in the second half of 2016 by investing more globally.

Simon Evan-Cook, senior investment manager of multi-asset funds at Premier Asset Management, observes: “It has been a respectable, if somewhat hair-raising first half of the year for equities, with US and emerging markets making the running. This reflects a wider theme for the year, where the only winners have been those perceived as the safest bets, such as US equities or stable-growers, or those that are recovering from a hiding last year, such as emerging markets and miners.

“Everything else has been weak. This is fantastic if you concentrate solely on one of those two areas, but frustrating for those of us who won’t bet the farm on a single horse.”

Value versus growth: Expert view

Michael Stanes, investment director at Heartwood Investment Management, considers the outlook for value versus growth:

“Growth stocks significantly outperformed value stocks in 2015 and, in our view, the degree of valuation differential between non-cyclical – for example, consumer non-durables – and cyclical companies such as financials, energy and miners is now sitting at extreme levels. Without a meaningful pick-up in corporate earnings growth, we believe it could be difficult for growth stocks to sustain their higher valuations levels in the coming months.

“Earnings growth has not kept pace with valuations and has tended to be driven by cost cutting rather than top-line growth. We see further challenges to corporate profitability, which is already contending with the effects of a strong US dollar and sluggish global economic momentum, particularly as the US Federal Reserve looks likely to continue on its rate-tightening path.”

But the election of a new US president in November and the uncertainty over when, or even if, the Federal Reserve will raise interest rates this year could begin to weigh more heavily on US companies.

Kully Samra, managing director at Charles Schwab UK, points out: “The two key headwinds we saw from an earnings perspective were the oil price and the strong dollar. Oil now is above $50 [per barrel, and] the dollar has continued to weaken.