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 Capital Group's Julie Dickson.
Hello Julie.
Julie Dickson: Hello, thank you for having us.
Wall: Thank you very much for being here. The rhetoric surrounding U.S. equities is that they are very expensive. However, when you drill down to look at what have been driving the stock market returns and S&P 500 for example over recent years. It looks very sector specific, doesn’t it?
Dickson: Well indeed large technology companies have really become a very significant part of the U.S. equity market over 25%. They have shown some spectacular growth both in profit, but also the share price movement in the markets for the last few years.
So indeed, if you look at the U.S. equity market just on its top level it will look expensive. But interestingly once you take those companies out of context and you look at the rest of the market there are some really interesting opportunities out there.
Wall: And are there any particular sectors that have lagged that average, very opposite to those tech stocks.
Dickson: Well there are some sectors, now the way we invest at Capital Group is we are very fundamental and very bottom up. So, the way we look at sectors is really just a result of the individual opportunities that we find. And there have been opportunities in health care, opportunities that have basically been in areas that have just been overlooked, because the markets' been so focused on the growth of the tech engines and the disruptors that are out there in the market. That being said those are still – companies that are still growing. So they still have a place somewhere in the portfolio.
Wall: So, another driver recently of U.S. equity returns as well as the tech stock growth have been Trump's tax reforms. However, some people say this is already priced into the market and so won't be a driver in the future. I know you say that your stock selectors and fundamentals but people and companies suddenly having more cash to play with must be a benefit right.
Dickson: Well, we don’t really speculate. So, the outcomes of these political agendas on market. We look at how companies individually will be able to take advantage of these different policies as they come through. And we try not to predict too much what these policies are going to be.
But what is true that in terms of corporate profits in the U.S. the tax reform has been a tailwind this year. In terms of next year in general we do expect earnings to still grow but probably on a slower pace than we have seen this year because those tax effects won't be there.
Wall: I wanted to pick up on something you said about tech stocks. Which is you said, but they are still growing. Does that mean, yes, they look expensive on some multiples; yes, they have done incredibly well. But we should continue to expect them to.
Dickson: So, some of these companies – they are innovators. They are market leaders. If you look at how the leadership of the U.S. equity market has changed over the last 20 years. It's gone from very industrial, very commodity driven and consumer driven companies to the big tech giants whether it's Alphabet, whether it's Facebook, whether it's Amazon which is still classified as a consumer company not a technology company.
They are all companies that are disruptors that are leaders in their field that continue to grow. So some might think the valuations might look expensive today, but again in our view we really look at the long term. We look at the sustainability and the quality of that earnings growth going forward and in some cases, we think the valuations are justified.
Wall: Julie, thank you very much.
Dickson: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
