Whatever you think of Donald Trump’s promise to ‘make America great again’, investing in some of the country’s largest companies has certainly been the savior of many an investment portfolio.
Due to the strong stock market performance, UK investors who bought into the S&P 500 index of major US equities early this year are light on the deal, despite the impact of the corona virus crisis.
Those who bought in March are on a neat profit. The technology-focused Nasdaq Index has performed even better and continues to hit record highs.
Is it worth buying US stocks at the current level? Investment experts recommend that you choose carefully if you plan to eat a slice of American Pie
Long-term investors also smile. If you had invested in the S&P 500 a decade ago, you would make a profit of almost 300 percent, while the Nasdaq made a profit of more than 500 percent, reducing the return of the FTSE All-Share Index by 87 percent relative to the same period.
Jason Hollands is director of asset manager Tilney. He says that the US has delivered “notable” stock market performance in both recent years and the current year.
But now that the nation is clearing up after yesterday’s (socially distant) independence day, is it worth buying American stocks at the current level? Investment experts recommend that you choose carefully if you plan to eat a slice of American Pie.
The mystery at the heart of American equities
At the onset of the coronavirus emergency, the US stock market plunged, followed by a major recovery, leaving many investors unsure whether the market’s strength is now justified.
“Opinion is divided as to whether the market is complacent about unresolved risks or appropriately ignoring the tidal wave of stimuli, the magnitude of which is unprecedented in a peacetime economy,” said Alasdair McKinnon, who manages the Scottish Investment Trust. . “The prospects promise a lot of fireworks.”
There are many counter forces at play on the valuations of American companies. Trump has an election to win later this year and would like a booming stock market to confirm that his stewardship of the economy has proven successful. This means that it is unlikely to allow policies that will harm investors. Then there is the large number of Nasdaq shares that have done well from the ‘corona culture’ and boosted their stock market valuation.
Richard Hunter is head of the markets at asset manager Interactive Investor. He says, “A handful of the world’s largest technology companies have been the driving force behind Nasdaq’s outperformance. This year, Facebook shares are up eight percent, Amazon 45 percent, Apple 23 percent, Netflix 38 percent, Alphabet 4 percent and Microsoft 26 percent. ‘
A handful of the world’s largest technology companies, including Facebook, have been the driving force behind Nasdaq’s outperformance, says Richard Hunter of Interactive Investor
Plus, there’s the Federal Reserve’s hunger to keep pumping cash into the economy to keep it from going into recession. McKinnon says, “The promise of greater economic stimulus from politicians and the Federal Reserve has delivered a security blanket that allows investors to see beyond the immediate negative news flow of corporate earnings.”
However, some obvious risks outweigh this: not least the fact that company valuations are now so high and the economic outlook is so bleak with the pandemic far from over.
Hunter says, “A recession that lasts longer than expected could have serious consequences for corporate earnings. The approaching reporting season of the second quarter and half year for listed US companies is likely to produce ugly results. ‘
Then there is the threat from China. Relations between the two economic superpowers are about as disorderly as you’d expect, given Trump’s persistent description of Covid-19 as “the Chinese virus.”
Cormac Weldon, head of US shares for investment house Artemis, describes US-China relations as “a slower burn” than the market volatility caused by the pandemic, but adds that the two countries “are prone to periods of heated rhetoric, something that could make the stock price much more bumpy for investors’.
The Nasdaq has made gains of over 500% in the past decade
Why it pays to look beyond technology
Craig Baker chairs the committee that determines how the Investment Trust Alliance invests its assets. He believes that those who look beyond the big tech stocks can find US investment gems.
While mega-tech stocks may continue to perform in the near term, Baker expects the more depressed sectors to rebound at some point as the “global economy is once again gaining ground.” He warns, “It’s a risky strategy to put all your eggs in the American tech basket.”
Investment confidence North American Income, managed by Fran Radano at investment house Aberdeen Standard, has suffered in performance from the lack of exposure to technology stocks.
The fund has fallen 0.8 percent in the past three months, 18.6 percent in a year and 9.8 percent in three years. But Radano insists his time will come.
He says, “In the long run, the US stock market remains attractive because it is home to many leading international companies.
“Market returns are never made in a straight line, but patient investors who buy high-quality, cash-generating companies at a reasonable price are well rewarded over time.”
McKinnon at Scottish favors American prospectors, as does Russ Mold, investment director at asset manager AJ Bell. Newmont Mining and Barrick Gold, the world’s largest gold miners, are both listed on the New York Stock Exchange. Alternatively, the listed NYSE Arca Gold Bugs fund invests in a basket of leading global gold mining companies.
Spread the risks by buying into a fund
Investors who want to sprinkle spangled stars over their investments have many fund options. The easiest way to invest over the pound is to choose a simple index fund that tracks the S&P 500 Index or Nasdaq Composite.
But Tilney’s Hollands warns that this strategy “exposes you completely to hot air balloon tech appraisals.”
He says, “A more conservative approach to the US market is possible through the Dodge & Cox Worldwide US Stock fund.
“It places a strong emphasis on buying companies at attractive valuations.”
The fund has risen 22.3 percent in the past three months, up 7.1 percent in 12 months and valued at 11.6 percent in three years.
An alternative is Invesco FTSE RAFI US 1000. This is a low-cost publicly traded fund that provides exposure to the 1,000 largest publicly traded companies in the country – with individual company ownership determined by income, dividends, assets and cash flow.
Hollands says, “The result of this strategy is broad exposure to the US market at low cost, but with a portfolio that is more skewed in favor of robust companies at reasonable market valuations.”
The fund has delivered a 19.9 percent return in the past three months, a 4.9 percent decline in the past year, and an increase of 15.2 percent in three years.
Teodor Dilov, analyst at Interactive Investor, presents investment fund Merian North American Equity and praises his ‘very experienced team’.
He adds, “The team effectively tracks the money – it checks what kind of shares other investors are buying and then buys the best in those categories.”
The fund has 200 stocks that are expected to outperform in the current economic environment.
Dilov also likes fund Miton US Opportunities because it is not heavily invested in the major US tech companies – only Amazon of the major tech stocks is among the top 10 holdings.
Darius McDermott is general manager of Chelsea Financial Services. He rates investment fund AXA Framlington American Growth that is more tech-focused than the Miton fund – the five largest companies are all tech companies, representing 26 percent of the portfolio.
Risks: Company valuations are now so high and the economic outlook is so bleak with the pandemic far from over
He adds, “Manager Steve Kelly believes that when the global economy comes out of lockout, inflationary forces are likely to remain low and the pace of economic growth to slow down – an environment where innovation will be key and technology companies will continue to thrive. ‘
For those seeking exposure to smaller U.S. companies, McDermott Federated Hermes recommends US SMID Equity.
According to manager Mark Sherlock, McDermott believes that if the U.S. brings more production home, smaller companies could be a big part of the resulting reconfigured supply chains.
Finally, he recommends the JPM US Equity Income fund for income seekers. McDermott says, “Despite the naturally lower return on the US market, it has a long history of paying dividends.
“This fund holds healthcare company Johnson & Johnson as the second largest position – a so-called dividend aristocrat that has increased its annual dividends for more than 25 consecutive years.”
Whichever U.S. investment fund you choose, you should keep an eye on the news – especially Trump’s Twitter account – in the coming months.
The land of the free may be, but with so many variables hovering over company valuations, America is home to the brave investor.
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