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Over-priced cracks in the American dream?

Fund managers are wary that a lot of good news is priced in to US valuations, with little room for manoeuvre if things go wrong.


The US has come a long way since the financial crisis of 2007. Six years on from the annus horribilis that plunged markets into a downward spiral, economic data has picked up and 2013 has seen particularly positive numbers.

Between the start of the year and 4 September, US stockmarkets have been performing well when compared with other indices. The S&P 500 has been climbing this year and has seen returns of 21.80 per cent as of 4 September compared with a 13.07 gain per cent for the FTSE 100 and a loss of 5.72 per cent for the MSCI Emerging Markets.

But there is still uncertainty in the market and commentators are starting to recognise some cracks in the positive picture. Against this backdrop, some have questioned whether the time has passed to up US allocations in portfolios and if other regions are looking more attractive.

The major issue the US economy will face is of its future with quantitative easing. Federal Reserve chairman Ben Bernanke suggested in June that monetary stimulus could soon be tapered if economic data started to look more positive.

Markets plunged with this statement and Bernanke is set to reveal what the actual plan is for QE later this month. Chelsea Financial Services managing director Darius McDermott is mindful of this risk, but says it may even be the case the Fed decides not to embark on tapering at alI at this time.

JP Morgan Asset Management global market strategist David Lebovitz believes an end to America’s monetary stimulus, when it starts to happen, should be taken as a good sign for the economy generally.

Lebovitz says: “There is a misconception that tapering is a bad thing. The last thing the Fed is going to do is pull the rug out from under our feet before it is ready. It is still going to be buying these assets at the end of the day.”

One area that concerns PSigma Investment Management chief investment officer Tom Becket is the health of the US property market, given its position as the cornerstone of the US economy. PSigma took profits from its US exposure in July, selling its holding in the Legg Mason US Equity Income fund. Becket says he is sceptical about data that points to rising house prices, and analysts’ suggestions that predict US earnings growth of 10 per cent a year.

Becket says: “We need to wait and see what raising mortgage rates and bond yields will do. We are neither optimistic or negative.

“Mortgage rates have direct correlations to bond yields. In the US where we have seen a collapse in treasury yields, this was followed by collapse in mortgage rates.”

Becket is also concerned about the impact of negotiations on the US budget this month and how to tackle the country’s debt problem.

He says: “We are about to go through another debt debacle. Last time this happened it led to a downgrade.

“There have been discussions going on behind closed doors between politicians and from what we understand they have not gone anywhere. Chuck that into the mix and that does make us tactfully cautious.”

Charles Stanley Direct head of investment research Ben Yearsley is positive on the US, having bought into the country this year for the first time, but is biding his time on future allocations due to uncertainty in the market.

Yearsley says: “The market is a bit skittish at the moment so there is no harm in waiting and there is a danger of trying to be too clever.”

Yearsley is optimistic on the US and the ability of the authorities to resolve the debt ceiling issue when they come around to it, but is mindful that valuations are not as attractive as they could be.

Yearsley says: “The biggest worry I have about the US is it is not cheap and they are pricing in a lot of good news. So if there are any hiccups you are in trouble.

“I am not adding any more [exposure] because there are some good opportunities elsewhere.”

Lebovitz sees US equities as attractively priced but does agree better valuations can be found elsewhere, which reflects the fact his asset allocation is more skewed towards Europe. That said, he believes strong earnings growth in the US will improve the situation for US equities.  

Lebovitz says: “Earnings growth is slowing and many people expected it to remain in the high double digits. That is the reason multiples are growing.

“As earnings growth gets going again it will offset concerns over opportunities in equities and we will see equities markets push up.”

BlackRock chief investment strategist Russ Koesterich says: “The US, based on price-to-book value, trades at a near 50 per cent premium to other developed countries. Some of this premium is justified given faster US growth, higher US profitability and less headline risk out of the US than out of Europe or China. But that said, US valuations still look a bit expensive.

“This does not mean investors should avoid allocating more to equities altogether. Those looking for a bargain should consider Europe and emerging markets. While both market segments will face near-term headwinds, each of these regions can still make a credible claim to being a value play.”


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