The America Economy: Opting for Growth
As many developed countries are trying to get their economies back on track, the US has taken a different tack in its attempts to rejuvenate the economy. While other countries have made significant cuts in government spending to reduce their budget deficits, the US is trying to grow its way out of the problem. The chairman of the US Federal Reserve, Ben Bernanke, expects the global economy to remain weak and has therefore signalled to markets that interest rates could remain low until 2014. Although the US seems to be on the road to recovery, the economic data has been mixed along the way which has made investors question the sustainability of the recovery. For example, in the first quarter of 2012 real GDP was expected to rise at an annual rate of 2.2% but this was revised downwards to 1.9% due to a deceleration in private inventory investment, acceleration in imports and a deceleration in non-residential fixed investment. During May 2012 the non-farm payroll data was weaker than forecasted and the figure changed little from the previous month.
However, there was some positive data in the first quarter of 2012. US consumer spending grew at its third fastest quarterly pace since the recession ended and was boosted by strong auto sales. There is also data that suggests a stabilisation in the housing market while core monthly retail sales and weekly retail sales figures are holding up reasonably well.
Chinese vs. American Manufacturing
There are also other structural reasons to be optimistic. As wages in China have risen considerably in recent years and its government is committed to raising wages over the next five years, global manufacturers are reconsidering whether China continues to be competitive as a low-cost production centre. Although the rise in wages in China could be offset by productivity growth, some manufacturers have relocated their operations to the US or increased investment in domestic production. For example, Caterpillar, the manufacturer of construction and mining equipment, is moving some production back to the US while the semiconductor chip maker Intel has been investing heavily in US manufacturing operations.
Working Towards Energy Independence
Moreover the US government under the leadership of Barack Obama is committed to increasing the country’s energy independence and has already made progress in this regard. Net oil and petroleum imports have been cut by 1 million barrels per day while, owing to technological developments, US field production of crude has been steadily rising since 2008. How the country develops its significant shale gas reserves will also be important as the combination of horizontal drilling and hydraulic fracturing has allowed access to large volumes of shale gas that were previously uneconomical to produce. The abundant supply could mean lower costs for companies where natural gas can be used as a production input and the US could also become a net exporter of natural gas as its prices are cheaper than elsewhere in the world. That said the US still needs to make the significant investment to build the infrastructure needed to make exporting to different countries more feasible.
The Current State of the American Company
While the domestic economic environment is key to a sustained US recovery, the strength of the overall global economy is also important as companies in the US stock market have become less-dependent on the fortunes of the domestic economy. The proportion of the revenues of S&P 500 companies that are derived from overseas is around 40%, up from 20% around a decade ago. Indeed many US companies have recognisable brands and are also global leaders in their respective markets which puts them in a strong competitive position.
Given that many S&P 500 companies are intertwined with the global economy, the low interest rate should, in theory, support the US recovery as it encourages investment from corporations but capital expenditure has been lacklustre thus far. The budget deficit is at levels not seen since the Great Depression in the early 20th century and its sheer size requires significant action. The US elections will be held in November and it’s still unclear what actions the incoming government will take to reduce the deficit and how corporations will be affected. In addition, the European sovereign debt crisis remains unresolved and makes company executives reluctant to make investment decisions in the face of such uncertainty. However, the US technology sector could benefit from any capital expenditure plans as companies look to upgrade their dated information systems which could lead to longer-term cost savings and that provides an incentive to invest in technology. The technology sector accounted for around 20% of the S&P 500 index so the rising trend in capital expenditure is likely to be a driver of market performance.
The manufacturing revival in the US, its growing energy independence, abundance of globally dominant companies and a recovering domestic economy make US equities attractive over the long term. There are many different ways for investors to gain exposure to the US equity market, such as different market-cap or equity style biases and the choice can have an impact on returns. Below are a few funds investors may want to consider.
It could also be worth noting that in the three years to 31 May 2012 the Russell 1000 Growth index outperformed the Russell 1000 Value index by 3.3 percentage points per annum. In terms of market capitalisation, the Russell 2000 index outpaced the Russell 1000 index by 1.2 percentage points per annum over the same period.
Highlighting Funds: Newcomers
The Cullen High Dividend Value Equity fund is rated Bronze by Morningstar OBSR. The fund benefits from very experienced managers in Jim Cullen and John Gould. Jim Cullen has been investing since 1964 and hired his now co-manager, John Gould, in 1989. They also benefit from a close knit team of six analysts and the last departure was in 1999. Although the fund is new to the European market, the managers have managed a similar US-registered product since 1994 and they follow a classic long term, value strategy and are disciplined in their approach.
The AXA World Funds Framlington American Growth fund is also rated Bronze by Morningstar OBSR. The fund offers investors exposure to an all-cap growth strategy run by a pragmatic manager with a long tenure. Stephen Kelly has been with Framlington since 1997 and has been running another fund using the same strategy since then. He seeks to generate returns from bottom-up stock-picking although he always considers the broader macro-economic environment in a thoughtful manner. His pragmatism combined with his awareness of the macroeconomic environment has enabled the fund to perform strongly through a variety of market conditions.
A cost efficient way for investors to gain exposure to US equities is through the HSBC S&P 500 ETF. This exchange traded fund has a total expense ratio of 0.09% and takes a full physical replication approach, meaning that the fund invests proportionately in the stocks underlying the S&P 500 index.
Highlighting Funds: Largest Funds
The Robeco US Premium Equities fund is rated Silver by Morningstar OBSR. The fund is managed by Duilio Ramallo who has been at the helm since it was launched. He invests in companies with low valuations, strong and positive business fundamentals, such as improving earnings. As a result of the bottom-up stock-picking process, the portfolio can at times be heavily tilted toward some sectors which can lead to bouts of underperformance.
Allianz RCM US Equity is rated Bronze by Morningstar OBSR. Lead manager Seung Minn invests in undervalued companies that are undergoing positive change, which are identified through a disciplined and integrated investment process. The manager has a preference for high quality businesses which are temporarily out of favour and are trading on attractive price/earnings ratios and which offer a catalyst for change. The process has led to competitive returns over the long term but it is also scalable given its large-cap bias.
The Franklin US Opportunities fund, which is rated Bronze by Morningstar OBSR, has an all-cap approach but typically has a mid-cap bias. Manager Grant Bowers invests in growth companies with sound balance sheets that also have the potential to grow earnings and free cash flows over the longer term with improving margins and return on equity. However, that distinct tilt toward growth stocks with potential valuation risk has led to significant volatility, but Grant Bowers has rewarded investors with strong returns over the long term.
A version of this article originally appeared in International Adviser.
