Tom Stevenson, investment director at Fidelity International, says American markets have momentum on their side following Donald Trump’s victory in the US elections, but warned optimism could soon fade.
The “Trump Bump” seen across the stock markets, which so far has been entirely confined to US shores, has left the US economy looking well primed and ready for growth, having expanded at a 2.8% annual rate in the third quarter, says Stevenson.
“The economy has shown itself to be resilient in the face of shocks, supported by a sharp fall in inflation and a generally healthy labour market. The big question is whether market optimism will soon fade. It might but what will be important will be the President-elect’s approach over the next four years.
“As ever, there are risks and US stock market investors have been required to contend with high valuations for much of the past year. That hasn’t changed since the election and European markets look cheap in comparison.”
Stevenson said there is a renewed fear around the reduced likelihood of an interest rate cut, which is no longer a foregone conclusion. At the same time, future tariffs will likely impact US consumer companies through higher input costs.
“The bond markets present another challenge. The cost of borrowing has risen to around 4.4% from around 3.7% in mid-to-late September. Another factor worth bearing in mind is the strength of the dollar. Despite a 0.75% reduction in interest rates since September, the dollar has soared over the past month. While this will help to keep import prices down, it will hurt exports and the earnings of American multinationals,” he explained.
“Despite these challenges, it’s hard to ignore the underlying strength of America’s corporate sector, or that the country has skirted a recession without the assistance of a sustained period of lower interest rates. Company earnings are currently expected to grow by around 9% this year and 15% next year. These factors support the case for a continuation of the current bull market. At just two years old, it remains relatively young.”
Stevenson listed three funds that allow investors to capture a diversified US exposure. The first is the Brown Advisory US Sustainable Growth Fund, which is mostly invested in larger companies with a durable competitive advantage and steady rather than rapid growth.
The second is the Dodge & Cox Worldwide US Stock Fund, which takes the approach of buying companies with depressed share prices.
Lastly, Stevenson said the Brown Advisory US Smaller Companies Fund could be an option for those interested in investing in smaller US companies with above-average growth and competitive advantages.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The fund manager views are their own and do not constitute financial advice.
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