The US was again the standout market in terms of performance in 2014, registering a third straight year of double-digit gains. The S&P 500 index finished the year up 13% in US Dollar terms, materially outperforming other global markets, including Europe, Japan and emerging markets. Following a very strong 2013, many forecasters at the start of 2014 predicted that the US would underperform both Europe and Japan on valuation grounds, but this did not happen.
On a sector basis, the top-performing sectors in 2014 were utilities and healthcare, with the S&P 500 Utilities and S&P 500 Healthcare indices returning 29% and 25.3%, respectively. Most analysts attribute the unusually strong performance of utilities at this stage of the business cycle to investors’ search for yield in an environment of ultra-low interest rates. As of mid-December, utilities’ average dividend yield was 3.7% compared with 2.1% for the 10-year US Treasury bond. As a result of their high dividends and consistent economic performance, utility stocks have become a popular alternative to fixed-income investments.
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% in 2014. The dramatic 40% collapse in the oil price during the second half of the year, driven by a supply/demand imbalance, had a significant impact on energy stock valuations, driving the whole sector down. The materials sector was also weak over the past year due to concerns over slowing economic growth in China and falling commodity prices. It is hard to overstate the importance of China to global commodities as it accounts for about half of global steel demand and two thirds of the iron ore market.
From a valuation perspective, energy and materials remain the cheapest sectors in the US market. While this creates significant investment opportunities, the risk remains that these commodity-oriented stocks could remain cheap for some time. At the other end of the valuation scale, the utilities and industrials sectors look overvalued according to Morningstar data. While utilities benefited from their reputation as bond substitutes, industrials enjoyed tailwinds from generally healthy macroeconomic conditions in the US and global trade expansion.
The Morningstar GDP growth forecast for US equities in 2015 remains at a steady 2.0% - 2.5%, helped by the consumer, but held back by a slow world economy. Morningstar economist Robert Johnson believes investors’ primary focus should not be on the falling oil price and actions of the US Federal Reserve, but on the consumer and demographics. He thinks that with energy supply and demand in relatively close balance, recent price declines aren’t likely to last that long.
And most commentators suggest that the current energy stock prices reflect a higher oil price than the current spot price. In terms of Fed policy, movements in financial markets are not necessarily consistent with the economic impact that the Fed may be seeking to achieve. For example when the Fed started reducing its bond buying last year, nearly all forecasters expected a significant rise in government bond yields, but instead bond yields fell materially.
Given the consumer represents about 70% of the US GDP, investors’ time may be better spent analysing what the consumer is doing. Johnson believes that in 2015 the demographics of an ageing population will limit employment growth, keeping consumption growth below its long-term trend of 3.6%, but above the 1.9% rate of the past 10 years.
We have highlighted funds where investors can gain exposure to this market which is likely to remain a large and important part of most investors’ equity exposure throughout 2015.
Best Over Three Years
Fidelity America is managed by Angel Agudo with the help of Fidelity’s 17-strong US analyst team, based in London. Until June 2014, the fund was managed by Adrian Brass who successfully led the strategy since 2008. The investment process focuses on stocks that are trading cheaply, but have a strong valuation upside that can be realised through a catalyst. The fund has an excellent track-record, although it was brought down to Neutral by Morningstar following the lead manager change.
Dodge & Cox Worldwide US Stock 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. The fund is rated Gold by Morningstar.
T. Rowe Price US Large-Cap Growth Equity has been successfully managed by Rob Sharps since its 2003 inception. The manager is supported by an analyst pool of 100 sector specialists who conduct detailed fundamental analysis. The strategy is based on the belief that 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 through its excellent performance track-record, but also through its active share which is significantly higher than peers. The fund’s investment philosophy hasn’t changed in two decades and has survived the test of time. Morningstar rates the fund Silver.
Morningstar analyst Lena Tsymbaluk’s fund selector article on US equity funds first appeared in International Adviser
