Darius McDermott, managing director FundCalibre offers four reasons to back US equities from Independence Day
Americans will be celebrating Independence Day this weekend. With events cancelled last year, 2021 is a return to normal for many, with parades, music, BBQs and fireworks.
And investors in the US stock market have just as much reason to be cheerful: the S&P 500 has returned 336.1%* over the past decade and 25.3%* over the past year alone.
As the global economy reopens, will the good times continue across the pond? Let’s take a look at the pros and cons of investing in the US today.
Four reasons to invest in the US:
1. Biggest source of investment ideas in the world
The US is the home to thousands of companies – of different shapes and sizes. It’s a broad market, ranging from old industry stocks to some of the most high-tech, growth-driven businesses. By value, it represents about half of all the quoted companies around the globe. Some of these are the most dynamic, innovative companies in the world.
2. Leading an economic recovery
The US economy is leading the world out of the post pandemic recession into a period of above average growth. While tech companies represent a big part of the US market, there are many other companies – especially small and mid-cap – that are geared to this period of booming US economic activity. This is a cyclical part of the market where valuations are lower and expectations more realistic.
3. Biden’s big infrastructure deal
President Biden has announced that he’s secured bipartisan support for a $1 trillion infrastructure spending bill. He’s now hit the road to sell the idea and, should the bill be passed, the money will be used to upgrade US roads, bridges, rail networks, water pipes and broadband connectivity over the next five years.
4. Income diversification
The yield on the US market is lower than in the UK, but it’s still an attractive 2%. Another positive is that US dividends suffered fewer cuts in the pandemic – indeed, dividends increased overall in 2020. And perhaps the biggest benefit for those that are hunting for yield is the diversification the US market offers in terms of sector coverage.
Three reasons to be cautious:
1. Higher inflation
In May, inflation in the US rose to 5% year-on-year – a level it has reached only once before in the last 30 years. Base effects continue to play their part in the data, as do the reopening and supply chain issues. Some of these price gains will no doubt be transitory, but where demand is grossly outpacing supply inflation concerns are prevailing and inflation may turn out to be stickier than first thought.
2. Potential interest rate rises
The latest minutes from the Fed meeting implied that interest rates could be raised twice in 2023 instead of 2024 or later, as had been projected earlier this year. In addition, Fed Chair Jerome Powell told reporters that the committee started to discuss the FOMC’s options for ending the bond purchase program – and it’s thought the first reduction could be as early as September.
3. Valuations
There has been an unprecedented march forward by US equities in recent times and its index is now well-ahead of pre-pandemic levels. That success has been driven by a handful of tech behemoths and there is now a growing consensus that these companies are starting to look too expensive to invest in for growth. This may impact investor confidence.
Four fund options:
1. Lazard US Equity Concentrated
This extremely concentrated US fund typically holds no more than 20 to 25 companies, ranging in size from the fairly small all the way through to the very large. It contains the best ideas from across Lazard’s US equity funds. The top ten currently includes healthcare, tech, self-storage and fast-food companies ^.
2. Schroder US Mid-Cap
The team behind this fund targets three specific types of stocks: ‘steady eddies’ which act as ballast in the portfolio; ‘mispriced growth’ – or stocks where the team feels the market has not fully understood the company’s earnings potential; and ‘recovery-type’ situations. It has a focus on small and medium-sized firms.
3. T. Rowe Price US Smaller Companies Equity
The manager of this fund looks for both growth and value opportunities in the small and mid-cap space, to build a diverse portfolio of the best ideas from the vast analyst resource at his disposal. He will allow his winners to run as long as he still believes there is a return opportunity. He will also invest in areas such as biotech, which other generalist funds often avoid.
4. JPM US Equity Income
Despite the naturally lower yielding nature of the US market, it has a long history of dividend payments and an increasing number of companies now paying a dividend. This fund has Johnson & Johnson in its top ten holdings^ – a dividend aristocrat that has increased its dividends for 58 consecutive years^^.
*Source: FE fundinfo, total returns in sterling to 1 July 2021
^Source: fund factsheet, 31 May 2021
^^Source: The Motley Fool, March 2021
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. Darius’s views are his own and do not constitute financial advice.
