Saturday, March 9 marks a decade since the start of the current US bull market. On March 9, 2009, the S&P 500 stood at 677 points.
Today, it stands at 2,750 meaning it has more than quadrupled in that time. On a total return basis, with dividends included, the market is up fivefold in US dollar terms. By comparison, the MSCI World index is up just 265% in that time and the MSCI EM index is up 175%.
While it is the longest, it is far from the highest; the market surged ahead 537.5% on a total return basis between October 1990 and March 2000.
And many have described the current bull run as the most hated in history. “Even though markets have hit historical highs [two in 2018 alone], it doesn’t really feel like it given how much risk aversion and volatility we have seen, particularly in 2018,” says Ritu Vohora, investment director at M&G Investments.
In fact, 2018 was the only calendar year in the past decade that the US market, as measured by the Russell 3000, has declined on a total return basis.
We’re late in the cycle and there’s an inevitability a recession will hit at some point in the next two to three years. Investors have been becoming more risk averse and defensive. Still, returns from equities look attractive versus cash and many places in fixed income.
For a long time, the US has been called “over-valued”, or “expensive”, but the late 2018 correction saw those valuations come down significantly. We’ve had a new-year relief rally, but on an earnings multiple of around 16-17 times, the S&P 500 looks more attractive than it has for a long time.
Indeed, John Weavers, manager of the M&G North American Dividend fund, says US companies are some of the best for growth in the world. Not only earnings growth, but also dividend growth.
He notes there are 205 companies in the US that have 10 consecutive years of dividend growth behind them. That compares with just 27 in the UK and 18 in Europe. Of that 205, 103 have compound annual growth rate in their dividends of 10% or more.
The US is still outperforming in the year-to-date, up 10.73% to the World index’s 9.8%, and Fiona Harris, US equities investment specialist at JP Morgan Asset Management, expects that to continue. “When there’s risks, worries and concerns, there’s a flight to quality and that quality aspect is definitely the US market,” she says.
Below, we asked a few fund managers where they are seeing value in the US stock market today.
Healthcare
The S&P 500’s healthcare sector was the best performing in 2018, rising 6.5%. But in the year to March 7, it has been the worst with a gain of 3.7%. The reason for this, according to Harris, is that the one thing both the Donald Trump administration and the Democrats can agree on is drug pricing. As a result, there’s every possibility regulation will tighten.
“We don’t think this impacts healthcare companies to the degree the market is pricing in,” Harris adds. Biopharmaceutical giant Pfizer (PFE) represents a large portion of JP Morgan’s US equity portfolios and Harris says she’s happy to continue holding.
The firm has a very strong balance sheet and good management team that will help it navigate potentially tricky markets. “It’s also got a number of drugs coming through the pipeline that the market doesn’t give it much credit for,” she adds.
Weavers agrees the market has overdone fears over regulation. He notes that healthcare stocks in general have done well since the 2016 election, so “it’s not quite at the level where you close your eyes and buy blind”.
That said, there are huge tailwinds to healthcare spending not only in the US but worldwide as the populations of developed economies become older and people live longer.
Despite this, fear of pricing pressure has led some areas to slip to levels not seen for three years when markets worried over a potential Hillary Clinton Government clamping down heavily.
One sub-sector Weavers likes is managed healthcare. It’s an area unique to the US and firms, like UnitedHealth (UNH), Anthem (ANTM) and Humana (HUM), manage individuals’ private healthcare needs.
In 2016, these stocks were trading on forward earnings multiples of 11.4 times before re-rating. Last week, the Democrats introduced a medicare for all bill into the House which proposes the Government become the sole payer for healthcare in the US hence rendering significant parts of these businesses’ earnings profile obsolete.
As a result, forward earnings multiples in managed healthcare are back down to 12.8 times. But Weavers thinks the bill is unlikely to find enough country-wide support to get passed. Therefore, he continues: “You’re starting to see an extremely attractive emerging opportunity from a valuation point of view in a sub-sector where there are guaranteed long-term growth prospects.
Consumer Staples
As we continue into a late-cycle environment, investors are increasingly becoming more defensive. Consumer staples is one sector that should become more in demand in this scenario. These firms generally own strong brands that make products that will sell however strong or weak consumer spending is.
But Harris stresses investors must pick your spots carefully. “Staples is an area where you have to have a laser focus right now because we know costs are rising and we’ve got wage inflation, so you’ve got to have companies who have pricing power.”
JP Morgan added Procter & Gamble (PG), the maker of Pampers nappies, Crest toothpaste and Head & Shoulders shampoo amongst others, to their portfolios late last year. “Procter & Gamble look, to our mind, like one of those companies that has pricing power and is able to push through price rises,” she explains.
Energy
The worst-performing S&P 500 sector during the correction in the final three months of 2018 was energy. The sector index declined by almost a quarter. As a result, energy stocks begun 2019 “at levels you hadn’t seen for many years, possibly decades”.
Of course, a lot of that was to do with the fact that the oil price declined by a third during that period. There are, therefore, plenty of risks associated with the notoriously volatile oil price in the sector.
But Weavers says there are plenty of ways to gain exposure to energy stocks minimal to zero oil price risk. This comes in the form of energy infrastructure companies like Oneok (OKE), Kinder Morgan (KMI) and Williams (WMB).
These companies will control the pipelines and other parts of infrastructure, transporting oil and gas, for instance, from the wellheads to the end refineries.
Despite their top lines not being beholden to the oil price, these companies still sold off as if they were. Unlike the pure-play oil majors, they have high visibility over their future revenues and cash flows.
“They were blowing out to yields of 6-9% in certain cases but were still seeing solid fundamental underlying growth because the US energy space is increasing production quite rapidly,” says Weavers. His funds added to already sizeable positions in late 2018.
Technology
While US tech isn’t generally associated with ‘value’, due to its reliance on the FAANG stocks, there are pockets of interest.
Harris continues to like Microsoft (MSFT), a stock her funds have owned for around 10 years. "Everything you can think of that is the go-to area in technology, there's a part of their business for that."
Elsewhere, semiconductors companies are also in demand. Harris and Walter Price, manager of the Allianz Technology Trust (ATT), both like the area, with the former having exposure to Texas Instruments (TXN) and Analog Devices (ADI).
"Both are very reasonably priced, we feel, but they are smaller position sizes than, say, Microsoft because there's more volatility and that's something we have to think about now."
Price has recently added a small position in Tesla to his portfolio, but it’s not high conviction and he prefers the components makers. “That’s an expertise that’s a lot harder to develop,” he explains.
“We think the ones that power semiconductors are going to see their market grow dramatically and because there are only a few of them those companies are going to make a lot of money.”
The company Price and his Silicon Valley-based team landed on is Cree (CREE), which is now a top 10 holding. Cree has a 62% share of the silicon carbide market, which is a key component in the charging of electric vehicles. “It’s essential technology and is hard to make,” says Price.
Cree is valued at one-tenth of Tesla – it sells at around 20 times next year’s earnings compared with Tesla’s 100 times. “It is a company that is growing at 50% per year and we think it’s going to add great value for investors.”
