I have been cautious on US equities over the past year, which seem particularly expensive looking at the S&P 500’s Shiller price-to-earnings ratio, which takes into account 10-year average earnings for companies. In the wake of Trump’s pro-business, lower taxes rhetoric, however, some fund managers are now forecasting higher corporate earnings and improved economic growth for 2017.
US Federal Reserve chair Janet Yellen’s rate rise in December was taken as a confirmation of this outlook and suddenly the US seems back to being the shining economic hope of the developed world. I think it is wise not to get too carried away – there are still a lot of Trump unknowns and markets are circling record highs, which means price risk is still very much a concern – but I have been overly cautious on the US before and missed some good profits.
Our clients consistently like Axa Framlington American Growth, which, true to its name, performs particularly well when the US market is in a growth phase. It was among our 10 most bought funds both last Isa season and in the last quarter of 2016.
If value does come into favour though, a fund such as Brown Advisory US Flexible Equity may do well. It has a value bias but will look for growth stocks too, and this style diversification makes it a good core candidate. Alternatively, I consider Hermes US SMID Equity a bit of a hidden gem. Its focus on small and mid-cap stocks could prove rewarding in a market in which large caps are so fully valued.
Something else for investors to keep an eye on this year will be currency and its effect on returns. The significant fall in the pound served investors well in 2016. European stocks, for example, were up 18 per cent in sterling terms. In local currency (that is, euro), they gained just 3 per cent.
The lower pound is also viewed as a positive for many of our larger companies who earn much of their revenue overseas. This has in large part been responsible for the strong gains in UK equities since the Brexit vote.
The currency tumble seems to have stabilised for now, however, which means the equities themselves will have to do the hard yards in the year ahead. With the pound’s drop, international stocks will also be more expensive for Brits to buy, so this may also reinforce an invest-local mindset this Isa season.
One possible area in which currency could help returns for UK investors is the US, where the dollar has risen strongly in the wake of the Fed’s December decision. Further rate rises are likely to send it even higher.
On the downside, this puts emerging markets under pressure and the stronger dollar is expected to be a financial headwind for certain emerging economies. In the last quarter of 2016, our clients chose wisely for this environment, with the Stewart Investors Asia Pacific Leaders fund our sixth most bought.