US equities have traditionally been popular among UK investors who want some diversification away from domestic equities. However, the Investment Association North America sector has only recorded positive net retail sales in two of the first eight months of 2016.
In July investors turned away from the sector, clocking up net retail sales outflows of £203m. It could be investors believe US equity valuations are too high, or that the impact of the ongoing presidential campaign is putting investors off.
The US stockmarket had a particularly prolonged period of low volatility over the summer.
“The S&P 500 index didn’t decline more than 1 per cent for 52 consecutive trading sessions, before Friday [September 16]’s 2.5 per cent fall,” observes Kully Samra, managing director of Charles Schwab UK. “Volatility spiked in the ensuing week, largely fuelled by renewed uncertainty over global central bank policy, rising US and global bond yields, and exacerbated by valuation concerns.”
The S&P 500 remains ahead of most other major regional indices though, up 33.2 per cent in the past 12 months to September 23, data from FE Analytics shows. Japan’s Nikkei 225 index is not far behind, climbing 32.5 per cent in the same period, while the FTSE 100 gained just 19.1 per cent. Mr Samra says: “We remain relatively optimistic that the long bull market in stocks can continue, but have been consistent in our view that the risks of a pick-up in volatility and more frequent pullbacks remain elevated.”
Taking a wider macroeconomic view of the US, Angel Agudo, manager of the Fidelity American Special Situations fund, expects the US economy to pick up pace in the second half of 2016, following a “soft start” to the year.
“As inflation and wages continue ticking up, a December rate hike is very likely, barring any big external shocks and/or significant reversal in financial conditions,” Mr Agudo predicts. “Growth may get a boost from fiscal policy measures, the extent of which will become clearer after the US presidential election.
“We expect the focus to move away from monetary policy to fiscal stimulus in the months ahead, with the US set for a fiscal boost in the coming years. Despite the late cycle dynamic, economic data is still positive in most areas, long-term structural supports will stay in place and a fiscal boost will provide the additional support.”
With renewed focus on fiscal policy likely, this could expose certain sectors of the US market to more interest from investors. Suzanne Hutchins, a member of the Real Return fund team at Newton Investment Management, believes one area set to benefit if spending in targeted areas increases could be infrastructure. “This means within the equity market there could be some pockets that benefit more than others – , for example, construction and materials firms,” she says.
When it comes to stockpicking, Tom Slater, manager of the Baillie Gifford American fund, suggests there are plenty of opportunities for active managers.
“I think the US is a remarkable engine for producing new growth businesses and companies that can scale up to a large size, addressing large opportunities, particularly the US west coast. But as we’ve moved into healthcare, we think Boston is important in that as well,” Mr Slater says.
