Independence Day: Is a recovery being born in the USA?

03 July 2013

As US Independence Day on the Fourth of July approaches, Jason Hollands, Managing Director of Bestinvest, takes a closer look at the US and highlights funds choices for those wishing to access the world’s leading equity market.

There is an old saying that “when the US sneezes, the world catches a cold”, so the health of the US should be high on the radar of all investors. That’s because the US remains the world’s biggest economy and accounts for around half of global stock markets by market capitalisation. The dilemma for investors however, is that the US economy has been sending conflicting signals for some time.

Mixed picture
Encouragingly, cyclical indicators such as home sales and vehicle sales have improved, while inflation has been modest. Of particular note, household net worth has not only returned to pre-crisis levels, it is now at an all-time high. While this won’t be spread equally, because a large part of this is down to rising stock prices benefitting wealthier Americans, it should nevertheless translate into improved consumer confidence and support the domestic economy. Additionally, US household debt servicing costs have dropped dramatically as rates are low, which means more disposable income to spend or invest.

On the other hand, employment growth has disappointed and manufacturing data has been patchy. US annualised GDP growth of 2.5% in the first quarter of the year also came in under forecasts of 3%, indicating that government spending cuts are nullifying the positive performance of the housing markets.

Interpreting Bernanke
This mixed picture provides the backdrop to recent comments made by Ben Bernanke around the potential tapering down of Quantitative Easing by the US Federal Reserve, which has rattled both bond and equity markets in recent weeks. This was not a firm commitment to end QE but guidance that the current rate of bond purchases would ease should US economic data improve as the Fed anticipates. The door however is left ajar for accelerating purchases if the data disappoints. In effect this was a warning shot to investors not to become complacent about future Fed policy to prevent bubbles developing in certain asset classes.

Low energy costs could fuel a manufacturing renaissance
Further afield, there are some other positive multi-year trends supporting the US economy, notably cheaper natural gas prices as a result of the booming shale gas industry. This is important because natural gas is a key cost input to many energy based industries such as petrochemicals, steel and fertilizers, but it is also used to generate electricity and is developing into an important transport fuel for trucks.

Lower energy costs are therefore helping to make the US progressively less reliant on energy imports and helping reduce the costs of US manufacturing at the very time wage inflation is rising in China. This closing of the manufacturing cost gap is one of a number of factors underpinning the emerging trend of manufacturing jobs being repatriated to the US, reversing the pattern of the last decade which has cost large numbers of US jobs. In the auto industry alone, firms such as BMW, Nissan, Maserati, Kia Motors, Caterpillar and Michelin have all announced plant investments in the US, while plant expansions have been announced by chemical firms such as Dow, Chevron Phillips and Shell.

Income an emerging theme
Over the last two decades, the US has been a market where dividend yields have been relatively low (1.8% on average between 2000 and 2010 and 2.5% in the 1990s). This compares to a long run average of 4.1% between 1926 and 2012.

Yet many US companies are now carrying large amounts of cash on their balance sheets at a time when they are earning little interest thanks to ultra-low rates. This partially underpins the increased propensity to pay dividends to shares again, with the likes of Apple announcing last year that it would start paying a dividend.

Focus on value
US equities have performed well over the last 12-months, with the S&P 500 total return index increasing by almost 25% over the last year. However, with a forward P/E ratio of 13.8 times earnings, US shares are not especially cheap compared to where they have traded over their own history.

A recovering US domestic economy combined with a strengthening US dollar could nevertheless provide attractive investment opportunities for sterling based investors. Balancing this up with the importance of not overpaying, we therefore think there is a case for focusing on US funds with an emphasis on identifying stocks that are undervalued and given the strong cash position of many US businesses we also think income is starting to become an interest theme in the US market.

The GAM Star GAMCO US Equity which we have recently given a new five-star rating and added to Bestinvest’s Select platform is new to the UK. The fund is managed by Mario Gabelli, who has a 20 year track record of managing a US mutual fund. This is a value fund which will target companies where there is a catalyst to unlock value, such as a corporate restructuring. Gabelli and his team of more than 30 analysts at GAMCO are particularly successful at encouraging company to company M&A deals between global industry leaders, especially in the food, drinks and consumer sectors. Some transactions can take a long time to work through so this fund is considered more viable for long term investors.

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Important information:
The value of your investments and the income from them can go down as well as up, and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns.

Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.

About Bestinvest:
Founded in 1986, Bestinvest was a pioneer of helping clients reduce the costs of investing through discounting commissions. Today Bestinvest has grown into a leading private client adviser which helps over 50,000 investors. Bestinvest offers a range of services including guidance, investment advice, financial planning and discretionary portfolio management all of which are underpinned by a commitment to rigorous investment research. Through its low cost Select service, Bestinvest offers execution-only investors a Self-Invested Personal Pension Plan (SIPP), Individual Savings Account (ISA), Junior ISA (JISA) and Investment Account with access to more than 2,000 funds as well as investment trusts, shares and Exchange Traded Funds. Bestinvest has won numerous awards including Wealth Manager of the Year (2013, 2011), Best Wealth Manager for Investments (2013), Best Stockbroker for Customer Service (2012), Best Wealth Manager for Inheritance Tax and Succession Planning (2011) as voted by readers of the Financial Times and Investors Chronicle. We have also been awarded Best Discretionary Adviser (2011) by Money Marketing and Investment Adviser of the Year (2012) at the Professional Adviser Awards. Headquartered in Mayfair, London, Bestinvest has 39 regional offices with more than 200 staff. The company is one of the fastest-growing private client advisory firms.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.