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Sector Focus: North America


This year got off to a rocky start for US equities. Until recently, investors believed the Federal Reserve would not raise interest rates in the near term; however, it has recently changed its language about being patient with rate increases and markets are now expecting a hike in the next few months. The prospect of higher interest rates has caused US stocks to fall, with dividend-paying companies, such as utilities, dropping the most. These stocks have been popular with income hungry investors during this period of low interest rates and bond yields.

In 2014 the US market delivered strong performance, registering a third straight year of double-digit gains. The S&P 500 index finished the year up 13 per cent in US dollar terms, materially outperforming other global markets, including Europe, Japan and emerging markets. The top performing sectors in 2014 were utilities and healthcare, as a result of their high dividends and consistent returns. Technology companies were also solid due to their attractive valuations and improving revenue growth.

On the flip side, falls in commodity prices led to poor performance for the energy and materials sectors. Energy was the worst performing sector of the year, with the S&P 500 Energy index declining almost 8 per cent. The dramatic 40 per cent collapse in the oil price during the second half of the year, driven by Saudi’s refusal to cut production unilaterally, had a significant impact on energy stock valuations, driving the whole sector down. The materials sector was also weak due to concerns over slowing economic growth in China and falling commodity prices. It is hard to overstate the importance of China to the prices of global commodities as it accounts for about half of global steel demand and two thirds of the iron ore market.

Overall, US stocks have been rising for six years now. The S&P 500 index is up more than 200 per cent since bottoming on 9 March 2009. A variety of factors have fuelled the market’s run, including healthy corporate earnings, a gradually improving economy and, finally, the massive quantitative easing stimulus programme that has pushed investors into stocks. However, the rally has slowed down in the past few months due to the Fed’s winding up of its easy money policy, slowing earnings growth and weakness in overseas economies.

From a valuation perspective, the US equity market is reasonably expensive compared to history. It is, therefore, felt the easy stock market gains achieved through multiple expansion as the global and US economies recovered have largely been seen. From here, market participants need to see corporate earnings growth coming through to support current valuation levels and push stock prices ahead. Margins in many industries stand at near peak levels and there is some concern about erosion, rather than any great expectation of further advances.

Therefore, picking individual stocks able to deliver growth will be crucial to outperform in this market.

Lena Tsymbaluk is manager research analyst at Morningstar


Morningstar’s top fund picks

Dodge & Cox Worldwide US Stock: The fund benefits from a considerable depth of management experience. It is guided by a nine-person investment committee, which averages more than 25 years of experience. Each individual has a significant investment in the funds they run. The approach is value-oriented with a contrarian streak. The team invests in undervalued large-cap stocks with good management teams, competitive advantages, and good growth potential.

T. Rowe Price US Large-Cap Growth Equity: This has been successfully managed by Rob Sharps since its 2003 inception. Sharps is supported by an analyst pool of 100 sector specialists. The strategy is based on the belief long-term growth in earnings and cash flows drive returns, and that rapid growth is often fuelled by innovation. The fund has set itself apart not only though its excellent performance track record but also its active share, which is significantly higher than peers. The fund’s investment philosophy has not changed in two decades and has survived the test of time.

Legg Mason ClearBridge US Aggressive Growth: Veteran managers Richie Freeman and Evan Bauman target dynamic companies with high growth rates they believe can be sustained for years to come. The process is purely bottom up with almost no attention to the sector weights of the fund’s benchmark. Individual positions can also be large and out of sync with the index. Once the managers find a stock that meets their investment criteria, they tend to be long-term holders.



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