Alex Illingworth, Co-manager, Artemis Global Select Fund
Since the global financial crisis people have warned that the US has become expensive compared with other major markets and therefore risky. We currently hold over 60% of our two global equity portfolios in North America. Although I have just returned from a trip there feeling as confident about the place as ever, the question arises: are we being reckless with investors’ money?
A glimpse into our investment personalities will explain why I find this question funny. We are valuation-focused investors. Our portfolio turnover is probably greater than that of some of our peers because we do not subscribe to a “buy and hold at any price” mantra. We take profits or sell when we think valuations have become stretched.
Over the long term this has helped us deliver strong returns. Hardly reckless! We call it prudent. We do not take big bets. And we do not hold stocks we think are overpriced.
So why do we and many other global managers have so much exposure to the US and how do we respond to concerns that American stocks are expensive?
The S&P 500 is currently valued at 17.3x next year’s earnings, the EURO STOXX 50 at 11.3x, the FTSE 100 at 9.9x and Japan’s TOPIX index at 14.6x. But the 10-year average for the S&P is just under 17x. So it is not historically expensive, but it is relatively speaking.
It is this differential that makes some investors nervous. A common argument over the past decade or so has been that it makes the US more vulnerable when a market correction strikes – the higher the valuation, the greater the fall. Critics have argued for a long time that in a period of multiple contractions the US would underperform.
The past year has seen such a period, so how did that argument pan out? Year to date in local currency terms the S&P 500 and EURO STOXX 50 are both down around 12%. But what matters to British savers is the sterling return. In GBP terms the S&P is only down 1.6%. It seems that a long-held hypothesis has failed. If nothing else, this reminds investors that there is no substitute for looking at the value for money on offer when analysing equities.
The US is a giant market. Its workforce is mobile, so it is not as vulnerable to labour shortages. It is a net exporter of energy. And its strong currency means that it is not importing inflation. These are just some of the features that have made it more resilient.
Finding fewer bargains
Of course, markets are always moving. A few weeks ago American stocks looked better value. Since mid-June to my writing in mid-August the S&P is up around 15%.
Other markets have risen, too, but not so much. It is harder to find bargains. Our most recent acquisition is a European stock we have been monitoring for years and which has finally fallen to a valuation we feel is reasonable. But we feel no compulsion to rotate significantly from the US to cheaper stocks elsewhere. Indeed, where possible, we tend to use a period like this to upgrade the quality of the portfolio.