America could see a recession within the next two years, the head of Schroders' multi-manager team has warned.
Marcus Brookes said investors may be rattled in the short-term by the US Presidential election on 8 November, but long-term investors needed to focus on the fundamentals - because a possible recession could come in the next two years.
"The US stock market since March 2009 is up 300 per cent. This reflects its reasonable economic growth, despite some soft patches, and I think investors have found themselves very much attracted to American companies in the belief this will continue.
"Japan and Europe in particular has been a lot more stop-start in their economic progression, so investors have been underweighting these regions and go quite overweight in the US."
According to Mr Brookes, he said investors could not expect "more of the same thing", because the backdrop was different. He commented: "We are quite late in the economic cycle and now is the time we will see the arrival of a few soft patches.
Our favourite market is not the US market from an equity point of view. Given the statistics, the future expected returns for that area is quite low. Marcus Brookes"This will eventually turn into some sort of a recession but our best guess is this isn't for another two years yet."
Furthermore, the S&P 500 was looking expensive, he said, which could create a headwind. He said the S&P 500 was trading at 20x price to earnings, whereas the average is about 16x. The forward PE for 2017 is that it will trade at approximately 18.5x - again still relatively expensive.
Although there is the prospect for dividend growth, he said there was "some worry" about costs.
Mr Brookes explained: "If America is in the phase where the best of that growth has been had, some of the slowdown is coming and we are seeing some wage inflation coming through, then the profitability of US companies will come under pressure."
He told FTAdviser: "Our favourite market is not the US market from an equity point of view. Given the statistics, the future expected returns for that area is quite low. We have a strong underweight to the US equity markets and are putting more into emerging markets within our portfolios."
Whether the US market movements will be mirrored in the UK later on - following the old adage that 'When the US sneezes, the UK catches a cold' - remains to be seen, he commented.
However, he said the 'Hard Brexit' route that the UK is taking may have slightly decoupled the movement of the FTSE from the S&P 500.
This comes as Mr Trump’s Republican victory over Democrate Hillary Clinton initially sent shock waves across the financial markets, only for the S&P 500 to recover ground on 9th November and finish the day up 0.75 per cent.
Mr Trump's calming words seemed to allay nervous investors, but as fund managers are concerned, the proof of the pudding will be in the eating once the Republican's various policies get put into place over the next four years.
While some, such as Hermes' Saker Nusseibeh, were concerned about the geopolitical risk of Mr Trump's foreign policy and the potential "damage" it could cause to some trading partners, others believed there were obvious sectoral beneficiaries in the US equity market.
For example, David Bertocchi, head of global equities at Barings, told FTAdviser he was confident the US will continue to see good growth opportunities, particularly where tech firms are concerned.
He believes those sectors exposed to infrastructure spending, such as industrial and technology companies will benefit most from Mr Trump's policies.
simoney.kyriakou@ft.com
