“Value opportunities have dried up in the US,” admits Schroders fund manager Nick Kirrage. “There is an extraordinary difference between stock valuations in the US and Japan. We have done extremely well in US stocks; pharmaceuticals, tech stocks… but now even the smaller companies are overvalued.”
Kirrage, who runs several value-orientated portfolios for Schroders, including the Silver Rated Recovery fund, says that in the past he has been able to use the breadth of the US market – an investable universe of around 4,000 companies – to find bargains. But now he struggles.
“The team put together a list of around 500 potential global investment opportunities recently, of that list only two US stocks made the grade. It is too expensive – people are backing concept stocks such as Facebook (FB) and Amazon (AMZN) with insane amounts of cash,” he said.
His colleague Robin McDonald, who runs the highly rated Diversity multi-asset fund range, agrees – in fact, he calls the US his least favourite market.
He admits US stocks have been a great place to be, but says over the next 12 months that will change.
“It has been very profitable investing in US equities,” says McDonald. “There is a business-friendly president in power, markets are buoyant, we have experienced global synchronised growth, consumer sentiment has rarely been higher. But this is the third longest expansion in US history – bull markets do not die of old age, but we believe the US economy is now late cycle.”
McDonald predicts rising inflation – pushed up by wage growth – which will trigger interest rates rises which in turn will put pressure on corporates.
“The tailwinds that have pushed this market on; the stimulus of low rates and quantitative easing, are no longer evident. Tax cuts might give the US a GDP ‘pop’ but it will be offset by growing debt and considerable government spending,” he says.
“At the moment, equities are assuming that there will be no big rate increases coupled with steady economic growth in the future – we don’t think either is true.”
The Bronze Rated Schroder Diversity fund, which McDonald co-manages with Marcus Brookes currently has 11% allocated to the US, with 30% invested in the UK, 32% invested in Europe and a further 18% invested in Japan. A money market fund is currently the top holding for the fund-of-funds, reflecting the duo’s cautious stance on stock markets as a whole.
