Stars and Stripes Forever?03 July 2015
Jason Hollands, Managing Director at Tilney Bestinvest, warns that with the 4th of July partying now over, investors in the world’s largest equity market could be heading for a hangover.
“After six years of sharp rises, the US equity market has become expensive and increasingly vulnerable to a sell-off. Rather than the US economy, it is the US equity market that has been the chief beneficiary of the ultra-accommodative policies implemented by the US Federal Reserve bank in the aftermath of the credit crisis.
“Years of loose monetary policy has been the key factor in fuelling the US share boom by enabling companies to re-finance their debt cheaply and finance share buy-back programmes. While this has certainly proven a boon to the corporate sector, it has in fact significantly damaged the pace of the economic recovery by preventing a proper default cycle from taking place, something that is unfortunately vital for the maintenance of a healthy recovery.”
The cost of capital has already risen
“Since the US ended its QE programme last Autumn, the Fed’s Chair of the Board of Governors Janet Yellen has been clearly signalling potential interest rate rises. Having been consistently more dovish than her contemporaries at the Fed, Yellen’s view is significant.
“Irrespective of when the US might start hiking rates again, which many think could be from September, the cost of capital has already risen. While Europe has been at the epicentre of the global sell-off in bonds since April, it should be noted that 10-year US Treasury yields have leapt to around 2.4%, up from 2% at the end of April, so the days of ultra-cheap money which have oiled the equity boom may already be over.
“Investors are perhaps being too sanguine about the risks to US equities from the withdrawal of this liquidity and the increase in the cost of capital, especially given the apparent stalling of growth in the global economy. With US equities trading at valuations well above long term trend, 26.7 times earnings on a cyclically adjusted PE basis compared to a long term median of 16.8 earnings, this is a concern. Given this, markets such as Europe and Japan, where central banks are continuing to expand money supply, present investment opportunities which some may find attractive at the current time – on a relative basis at least.”
Be cautious towards traditional US index trackers – for now
“As the world’s largest equity market, most long term investors should have some US equity exposure and it has become almost received wisdom that the best way to do this is through a low cost index fund – it is indeed an approach I’ve used in my own portfolio. However given concerns about US market valuations investors should be cautious before investing in a traditional market-cap weighted index tracker at this time.
“Index trackers have low costs and are fully invested, so are a great way to participate in a strongly rising market as we have seen in the US in recent years, but if you believe a market is expensive and vulnerable to a sell-off it’s the last type of investment you want to be putting new money into.
“Those looking to invest in the US now, or wishing to switch existing holdings into something more defensive, would be wise to choose funds which focus on high quality companies that don’t carry lots of debt and do not appear excessively expensive. These types of funds may not have led the pack in recent years, but in an environment where there is a turn in sentiment and market dynamics they should prove more defensive.”
Hollands makes the following fund picks:
“For those keen on pursuing a passive approach, an alternative to a traditional market-cap weighted S&P 500 Index tracker is the Powershares FTSE RAFI US 1000 UCITS ETF. This ETF tracks an index of 1000 stocks that are weighted on a basket of fundamental factors comprising revenues, cash flow, dividends and net assets on their balance sheet rather than market-capitalisation. This approach leads to a bias towards value stocks and companies with robust balance sheets, rather than more speculative, “growth” companies.
“The Dodge & Cox Worldwide US Stock GBP fund invests in large US companies with a market cap greater than $3 billion, pursuing a “value” strategy that avoids high risk areas such as biotech or new media companies. Dodge & Cox are an independent, manager-owned San Francisco based asset management firm with a team process that has a very long track record.
“The Aviva Investors US Equity Income II is managed by a Kentucky-based value manager, River Road Asset Management, who are owned by Aviva. The fund has yield target of achieving 1.5% above the yield on the Russell 3000 Value Index. Companies must have a market cap of at least $1 billion, so the fund has exposure both to mid-caps and larger companies."
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.
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 YourMoney.com 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.