With Middle America tipped as a “new emerging market” thanks to a shale gas and manufacturing boom, should investors look beyond popular US tech giants, pharmaceuticals and financials to “rust-belt” stocks?
The Bank of America fund manager survey for August 2013 shows US overweights in pharmaceuticals, tech, financials and the discretionary sector, while the energy sector remains an underweight position.
However a number of fund managers point to the recent surge in manufacturing and shale gas production taking place in Middle America, with some predicting the potential for emerging market levels of growth.
Key geographies stretching from Ohio to Western Virginia have been growing GDP faster than the national average this year, according to Henderson Global Investors head of global equities Matthew Beesley.
He says: “In the Midwest — the booming market in shale gas exploration and development is creating jobs and demonstrably leading to faster-growing local economies.”
Jupiter head of multi-manager John Chatfeild-Roberts says the significance of the US energy boom in Middle America could see the region achieve ‘emerging market’ growth.
He says: “America is growing, but the cheap and available labour force, the potentially plentiful supply of energy – if indeed their shale reserves are the bonanza that many hope – and falling input costs will be crucial for momentum to build.
“Looking over the next five years would it not be somewhat ironic, and certainly contrarian, to suggest that the best performing ‘emerging market’ might just be middle America?”
The growth potential within this area of the US market has prompted some managers to invest directly in shale gas exploration and production companies. Artemis fund manager Alex Illingworth holds a number in the £33.9m Artemis Global Select fund.
He says: “The US has been a very big importer of oil and that is now decreasing. Our focus in the fund has been particularly at the Eagle Ford Shale formation in Texas.
“The stocks that we have used in the portfolio and continue to hold today are Marathon Oil which has disposed of its refining capacity, and EOG resources.”
Illingworth goes on to argue that the companies which provide the products and services into the oil and gas industry make for an even more “interesting” investment opportunity.
He gives the example of current holdings in Spectra energy which distributes shale, as well as the railways providing transportation of the oil and gas itself, including Norfolk Southern railroad and Union Pacific.
Rathbone global fund manager James Thomson also holds a combination of stocks with both direct and indirect exposure to the shale oil and gas industry in the £260.9m Rathbone Global Opportunities fund.
He says: “I have some shale oil and gas companies which are actually producing shale oil and gas in Texas and North Dakota in Pennsylvania. However the more interesting play is pipelines. It is all well and good to discover oil liquids or shale gas, but how to you monetize that?
“There are a number of ways but by far the most cost effective and long-term solution for getting the oil and gas to ports and refineries is pipelines. I hold Mastec, there business is absolutely booming.”
Henderson investment manager Hamish Chamberlayne says he “struggles to find value” in some railroad companies linked to the energy boom, having recently sold out of Union Pacific across the Henderson global portfolios.
Chamberlayne favours stocks that are “indirect beneficiaries” from the lower gas prices in the US as a result of the increased onshore energy production. He says: “We own indirect beneficiaries of the shale gas boom, so stocks that are geared into a stronger US economy.
“This is where the greatest benefits of the lower gas prices have been felt. We have not got much direct exposure, the producers of this gas and shale oil. Very simplistically a falling gas price has not been particularly beneficial for producers.”
Sectors such as financials and consumer discretionary have performed well year to date because they receive a knock-on benefit from the vast economic impact filtering through the US economy from lower energy prices, adds Chamberlayne.
Chelsea Financial managing director Darius McDermott agrees the energy revolution will create jobs and wealth and boost growth.
However, McDermott warns gaining exposure to this theme obviously involves buying into the US market, which he argues does not look cheap at an overall index level.
He says: “You can see that the energy revolution is going to be positive for the US but what we are still talking about is buying US equities at the end of the day, and looking at the S&P index the US looks fairly valued.
“That does not mean it isn’t a good time to invest in US equities, because I don’t think the market is expensive but it is definitely difficult to argues that it’s cheap. There will be value for stock-pickers who can use their skills to find the winning stocks.”
Illingworth goes further to argue that global opportunities could arise if and when the shale revolution should extend beyond the US. He says: “There are significant political and regulatory hurdles for the shale revolution to happen outside the US.
“However we do feel that others will succeed in the near future and we will look to exploit that in the Artemis Global Select fund.”