Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Ian Heslop, Manager of the Old Mutual North American Fund.
Hello Ian.
Ian Heslop: Hi Emma.
Wall: So, U.S. sentiment, seems to fall into two very distinct camps at the moment. That is that these record highs are actually the new norm and because of various central bank policy, because of the underlying macro environment, actually valuations aren’t this high and they have further to go. Although is the complete counter argument that the U.S. rally has been great for those who have been in it, but this is the top get out now while you can, where do you fall on that spectrum.
Heslop: Well I think U.S. equities or North American equities have moved to reflect the growth that you can see in the economy. We've seen some good earnings growth from many companies, but I wouldn’t sit here and argue that equities are cheap.
They are not aggressively expensive when you take into account the growth you can see in north America, but they aren’t cheap. I think one of the things that we do have to be aware of is as valuations rise obviously there is less of an ability to soak up any problematic information that might come out of either the economy or individual companies or indeed the White House, given that we have quite an unpredictable kind of political environment as well in the U.S.
Wall: Presumably there are stocks which are more sensitive to those issues that you just described, and those that are perhaps less so and indeed perhaps look better from evaluation point of view. Because we are looking at the market as a whole, well there are thousands of U.S. listed companies aren’t there.
Heslop: It's exactly right and when you look at the U.S. market and you look at what's being driving the U.S. market over the last sort of 12 months. And it's been very tightly held in a certain number of stocks. So, there is definitely pockets of valuation opportunities within North America in aggregate you could argue that the North American market is a little bit more expensive, than it certainly has been trading recently. What we look at, one of the interesting things we find is that when we think about where investors have been putting their money in North America. One of the ways they have been tapping North American markets is through ETFs. So, index type products.
Now that naturally leads to the stocks that are in those indices becoming somewhat more expensive than the stocks that aren’t in those indices. You do find that in North America the large cap stocks are trading very expensive relative to the small and mid-cap stocks. So that’s one of the things I would point to that there are opportunities maybe in less well travelled stocks within North America to still find good value. But some of the kind of larger cap names and the fangs that I was alluding to just before there.
They are trading really quite expensively relative to where they have traded historically. Now that maybe for a good reason. They are showing strong earnings growth, they have a lock on a certain area of the economy. But we do have to be very aware that these valuations don’t leave much if there is a problem with individual names.
Wall: So smaller and mid-size going down the cap scale. What about any particular thematic or sector picks that you think look like a good opportunity right now.
Heslop: So, I think one of the things we've all had to deal with within the North American market is that it has been highly rotational. And it's been highly rotational over and above any changes that we've seen at the economic level.
So, the economy is chugging along there is not too much difference between say the economy pre-Trump to the economy now. But what we are seeing is significant rotations in sentiment. So, investor sentiment is changing and that does impact and reflect on the types of stocks that you should be holding in my view in a portfolio. So, at the moment if we go back to the beginning of the year it was very, very risk on, everyone was very happy, investors were very confident about the outlook. So, investors were buying a lot of the riskier names within the U.S. market.
Now that’s kind of come full circle and we are back to those types of stocks that investors were holding in 2015. So, to a degree the bond proxies but very much more kind of balance sheet strength companies. Companies that are stable enough to deal with an unstable macro environment, effectively investors are even though markets are moving somewhat more high to greater heights, investors are kind of voting with their feet.
They are definitively reducing the risks that they are taking within North American equities and certainly now, I think that has obviously to do with, you can’t avoid the political noise that we have at the moment in North America it has not to do with the macro itself. The economy is chugging along as I said. But very much at the moment I think people are hunkering down a little bit within equities.
Wall: Ian, thank you very much.
Heslop: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
