How investors can diversify their US equity exposure

This article is part of
Guide to US Equities

How investors can diversify their US equity exposure

As overall market valuations continue to rise, investors are starting to think more carefully about how they access the US market.

Areas like small and mid-caps as well as value stocks started to outperform in late 2019 – but will these new trends last?

If equity investors have had a successful decade, much of this is down to the performance of the US market.

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The S&P 500 has outperformed major indices in the UK, Europe, Asia, Japan and emerging markets over six of the last calendar years in sterling terms.

As of late December it led the pack over one, three, five and 10 years.

2019 has only seen a continuation of this trend: the country’s equity market has dominated its peers, with the S&P 500 making a sterling return of more than 20 per cent.

This index hit a fresh all-time high towards the end of 2019 as trade tensions between the US and China appeared to ease.

However, when combined with some of the challenges facing investors, such strong returns can pose a problem.

High valuations

Many investors have long viewed US stocks as expensive, and lofty valuations only have further to fall if the economy runs into trouble.

Among other challenges, the US/China trade war is expected to rumble on despite recent concessions and global growth looks far from robust.

At the same time, the FAANG stocks that have tended to lead both rises and falls in the market in recent years face problems of their own.

Meanwhile, 2019 has brought glimmers of hope for a different segment of the market.

In early September, for example, energy stocks in the S&P 500 sold off heavily while classic “value” names such as energy stocks made significant gains.

While global growth remains relatively anaemic for now, any move towards fiscal stimulus – an idea mooted by various developed market governments – could create conditions that tend to favour a value approach.

All of this means that while investors are reluctant to turn their backs on the world’s leading market, it might be time to at least fine-tune their exposure.

As noted, one idea to consider is the resurgence of value stocks.

In the November issue of its global fund manager survey, Bank of America Merrill Lynch observed that professional investors had made a big move into value stocks on the back of higher inflation expectations and reduced concerns about a coming recession.

And value has certainly stood out in the US lately.

The S&P Value index lags its Growth counterpart over the last, three five and 10 years, but the two are roughly level over one year.

Furthermore, the Value index was up by 13 per cent for the six months to 18 December in local currency terms, outpacing a 7.7 per cent gain in the Growth index.