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American strategies

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Fund managers are conflicted on the future of the US equity market and are using tactical positions in an attempt to get returns.

The end of quantitative easing and negotiations to raise the debt ceiling in the US, alongside a drop-off in production in Japan, are likely to have an impact on the US economy.

However, the US equity market, with its huge stockpicking opportunities, cannot be overlooked. Fund managers have a range of views about the future outlook for the US economy and its currency.

Fidelity’s head of asset allocation Trevor Greetham says he favours US equities because the looser fiscal policy in the US means it is “more pro-growth” than the UK.

He suggests the US government is likely to press ahead with more quantitative easing later this year. He says: “Roll the clock forward four or five months and I expect inflation levels to be very low and central banks will try another 600, if that is not right they will try 800 or perhaps 400. They will want to calibrate but I think we will get more.”

Ignis chief economist Stuart Thomson similarly believes the Fed is in “a fortuitous position” due to a rebound in economic activity during July and August.

He adds: “We do believe that the end of QE will have an impact on financial markets but not immediately. Risk markets will also be boosted by the perennial optimism that surrounds the quarterly reporting period in the US.”

He adds that the rebound in US activity and, in particular, the stimulus from lower oil prices should boost global confidence and risk appetite over the summer months. “Global activity will resume its slowing trend in the fourth quarter. The US will get some temporary support from tax incentives for investment but this will merely borrow from 2012 growth,” he says.

The macro situation is putting a cap on US equity markets but the underlying fundamentals of the markets are quite good and valuations are attractive.

Skandia head of asset allocation Rupert Watson believes the global economy should pick up in the second half of the year. “Auto production in Japan should rise in the third quarter. The rise and fall in oil prices in the US should help growth in the second half of the year.”

He adds he is not very positive about growth in the US, as lots of negative factors still remain, such as a weakness in the banking sector affecting growth and a weak housing market, which he does not believe will recover before 2013.

However, he is upbeat on the prospects for US equities. He says: “We believe the economic recovery will continue. We think interest rates will stay low, especially in the US, and valuations are quite attractive.”

In the model portfolios that inform portfolio management at Skandia, Watson is overweight Japan and emerging markets comparative with the US. “Growth is more robust in emerging markets and there is lower debt levels. There is less risk in terms of their own deficit.”
Fund managers that are constrained to US equities markets do not have the same luxury of asset allocation, so what strategic decisions are they making?

Threadneedle head of US equities Cormac Weldon, manager of the £1.6bn American fund and £1.2bn American select fund, says he is not sure where the negative impact of QE2 will fall. “There will be at best moderate growth in the US with a 2 to 2.5 per cent GDP growth over the next 18 months. From the early part of this year, we have increasingly invested in better than average companies that are independent of the economy across the sectors.”

“An example of this is increasing our weighting in commercial service stocks in capital goods, like adding around a 2.5 per cent position to manufacturer Tyco in February in both the American and American select fund. We have been taking our focus away from cyclical stocks.”
Tom Walker, manager of the £677m Martin Currie North American fund says valuations are very attractive, given that interest rates are low and will remain so because of the economy.

“Companies are sitting on cash because they are worried about the macro-environment as well, so I think the way we are thinking about it is that the macro situation is putting a cap on US equity markets but the underlying fundamentals of the markets are quite good and valuations are attractive,” he says.

“We have added more money into consumer discretionary, moving from an underweight position we held a year ago to a 5 per cent position now. We are not bullish on the consumer in America but favour a number of luxury retailers, whose customers are less affected by the economic situation, and companies where people are trading down, such as McDonald’s.”

Rathbones investment director David Coombs says: “I have taken hedging out of US dollar-denominated equities, as the sterling is vulnerable. The dollar is the flight to quality. When there is market volatility, the dollar market rallies.”

Coombs removed the dollar hedge on the 7 per cent exposure in US equities at the end of January on the £49.3m multi-asset strategic growth fund and removed it on the £31.4m multi-asset total return fund over a year ago.

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