US stock markets in 2015: Are there any pockets of value?

US companies have gained a renewed swagger from cheaper energy at home

Fund managers are finding opportunities in retail shares.

According to IMF forecasts, US growth will accelerate to more than 3 per cent in 2015 (compared to just over 2 per cent this year), tearing past other G7 countries like Britain, which is expected to grow by around 2.7 per cent. The Dow Jones and S&P 500 stock indices have risen by roughly 9 and 12 per cent respectively year-to-date, with both touching all-time highs in recent weeks. American firms, meanwhile, continue to benefit from what Nutmeg’s Shaun Port describes as a “driving force of the US economy” – cheaper energy at home as a result of the shale revolution. Surely there’s never been a better time to buy US stocks?
Not necessarily. The Federal Reserve will almost certainly hike rates next near, typically a trigger for volatility in equities, and many argue that the stratospheric stock market gains seen since the financial crisis (the S&P 500 has risen by more than 65 per cent since December 2011) cannot be repeated – valuations are simply too stretched. Jason Hollands of Tilney Bestinvest, for example, points out that “much of the earnings from the S&P 500 in recent years have come from reduced debt servicing costs and restructuring savings – not top-line growth,” making the market vulnerable to a correction.
But given the huge size of US-listed assets (according to World Bank data, US companies accounted for 40 per cent of worldwide market capitalisation in 2012), practically no one would recommend avoiding American stocks entirely. So where can pockets of value be found?

RIDING THE COMMODITY WAVE

“It’s now more challenging to find value following a strong run,” admits Angel Agudo, a portfolio manager for Fidelity’s American Special Situations Fund. But the US market’s size and variety continues to throw up opportunities for the selective stock picker. The retail sector in particular looks likely to benefit from a pick-up in disposable incomes as commodity prices fall, he says, with lower fuel bills giving consumers extra cash.
Clare Hart of the JP Morgan US Equity Income Fund agrees, pointing out that US families with an income below $50,000 (£31,867) on average spend about 20 to 25 per cent of their total household income on energy, while around 60 per cent of Americans spend nearly 15 per cent of their discretionary spending on gasoline. She says that her fund is overweight the consumer discretionary sector, with a particular focus on companies that have fostered brand loyalty among customers.
Agudo argues that companies in the energy sector, even those linked to oil, could be a good bet. With the recent oil price crash, the sector has been heavily sold and “valuations are hovering around historical lows,” he says. But this creates opportunities for some of the more robust companies to outperform expectations.
Investors may also find opportunities in stocks linked to government spending, according to Agudo. Much to the chagrin of some in the Republican party, budgetary constraints are easing, and capital expenditure looks set to rise, he says. This level of research will likely only suit investors with plenty of time on their hands.

THE PASSIVE OPTION

But what about those looking to find value in US markets without going down the stock-picking route? Laith Khalaf of Hargreaves Lansdown says that it can be difficult to find active managers that consistently beat US indices – surely one of the most-researched markets around. On the other hand, tracker funds that mimic the returns of the S&P 500 or the Dow would be vulnerable in the event of a correction. And with the S&P’s current cyclically adjusted price-to-earnings ratio standing at almost 27, compared to a historical median of 15.95, some say these indices are too expensive
One option, according to Hollands, is to use funds that have a “value-tilt”, rather than piling into an S&P tracker. The Invesco PowerShares RAFI US 1000 fund, an exchange-traded fund, weights companies based on a basket of fundamental characteristics, he says, rather than the “blunt measure” of market-capitalisation.
But for longer-term investors, a spot of market volatility over the next year is likely to be less noticeable, and cheap, straightforward index trackers might be a better option. Khalaf says that the L&G US Index fund is a good pick. It’s risen by 21.8 per cent over the past 12 months, according to FE Trustnet data.

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