Whatever you think about Donald Trump’s promise to ‘make America great again’, investing in some of the country’s biggest companies has certainly been the saviour of many an investment portfolio.
As a result of strong stock market performance, British investors who bought into the S&P 500 index of major American stocks at the beginning of this year are slightly up on the deal despite the impact of the coronavirus crisis.
Those who bought in March are sitting on a tidy profit. The technology-focused Nasdaq Index has done even better and continues to hit record highs.
Is it worth buying US stocks at current levels? Investment experts suggest you should choose carefully if you’re planning on a slice of American Pie
Longer-term investors are smiling, too. If you had invested in the S&P 500 ten years ago, you would be sitting on a near 300 per cent profit, while the Nasdaq has posted gains of over 500 per cent, dwarfing the FTSE All-Share Index’s 87 per cent return over the same period.
Jason Hollands is a director of wealth manager Tilney. He says the US has been the ‘stand-out’ stock market performer – both in recent years and the year-to-date.
But as the nation clears up after yesterday’s (socially distanced) Independence Day celebrations, is it worth buying US stocks at current levels? Investment experts suggest you should choose carefully if you’re planning on a slice of American Pie.
The conundrum at the heart of US stocks
At the start of the coronavirus emergency, the US stock market suffered a huge fall followed by a large rebound, leaving many investors undecided about whether the strength of the market is now justified.
‘Opinion is divided as to whether the market is complacent to unresolved risks or is correctly discounting the tidal wave of stimulus, the scale of which is unprecedented in a peace-time economy,’ says Alasdair McKinnon, who manages the Scottish Investment Trust. ‘The outlook promises plenty of fireworks.’
There are many opposing forces playing on US company valuations. 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 proved successful. This means he’s unlikely to allow any policies that harm investors. Then there are the high number of Nasdaq stocks that have done well out of ‘corona-culture’ and pushed up their stock market valuations.
Richard Hunter is head of markets at wealth manager Interactive Investor. He says: ‘A handful of the world’s biggest technology companies have been the driving force behind Nasdaq’s outperformance. This year, Facebook shares have increased by eight per cent, Amazon 45 per cent, Apple 23 per cent, Netflix 38 per cent, Alphabet 4 per cent and Microsoft 26 per cent.’
A handful of the world’s biggest technology companies, including Facebook, have been the driving force behind Nasdaq’s outperformance, says Richard Hunter at Interactive Investor
On top of all this there’s the Federal Reserve’s appetite to keep pumping cash into the economy to ensure it does not go into recession. McKinnon says: ‘The promise of more economic stimulus from politicians and the Federal Reserve has offered a security blanket that allows investors to look beyond the immediate negative news flow from corporate earnings.’
Weighing against this though are some obvious risks: not least the fact that company valuations are now so high, and economic prospects so gloomy with the pandemic far from over.
Hunter says: ‘A longer than expected recession could have serious implications for company profits. The imminent second-quarter and half-year reporting season for listed US companies is likely to make for ugly reading.’
Then there’s the threat from China. Relations between the two economic superpowers are about as uncordial as one might expect given Trump’s persistent description of Covid-19 as ‘the Chinese virus’.
Cormac Weldon, head of US equities 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 bouts of heated rhetoric, something which could make the stock market ride much bumpier for investors’.
The Nasdaq has posted gains of over 500% over the past decade
Why it could pay to look beyond tech
Craig Baker is chairman of the committee that determines how investment trust Alliance invests its assets. He believes that those who look beyond the big-name technology stocks may find some US investment gems.
Although mega-technology stocks could continue to outperform in the short term, Baker expects more depressed sectors to bounce back at some point as the ‘global economy regains its footing’. He warns: ‘It’s a risky strategy to put all your eggs in the US tech basket.’
Investment trust North American Income, managed by Fran Radano at investment house Aberdeen Standard, has suffered performance wise from its lack of exposure to technology stocks.
The fund is down 0.8 per cent in the last three months, 18.6 per cent in a year and up 9.8 per cent over three years. But Radano insists its time will come.
He says: ‘Over the long term, the US stock market remains attractive as it is home to many leading global companies.
‘Market returns are never made in a straight line, but patient investors who buy high-quality, cash-generative companies at fair prices have been well rewarded over time.’
McKinnon at Scottish favours US gold miners as does Russ Mould, investment director at wealth manager AJ Bell. Newmont Mining and Barrick Gold, the world’s biggest gold miners, are both quoted on the New York Stock Exchange. Alternatively, exchange traded fund NYSE Arca Gold Bugs invests in a basket of leading global gold mining companies.
Spread the risks by buying into a fund
Investors who want to sprinkle some spangled stars over their investments have many fund options. The easiest way to invest ‘over the pond’ 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 leaves you ‘fully exposed to ballooning tech company valuations’.
He says: ‘A more conservative approach to the US market is available through the Dodge & Cox Worldwide US Stock fund.
‘It has a strong emphasis on buying companies at attractive valuations.’
The fund is up 22.3 per cent in the last three months, down 7.1 per cent over 12 months and up in value 11.6 per cent over three years.
An alternative is Invesco FTSE RAFI US 1000. This is a low-cost exchange traded fund which provides exposure to the country’s 1,000 largest listed firms – with individual company holdings determined by revenues, 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 more skewed in favour of robust businesses on reasonable market valuations.’
The fund has generated a return of 19.9 per cent in the last three months, is down in price 4.9 per cent over the past year, and up 15.2 per cent over three years.
Teodor Dilov, an analyst at Interactive Investor, suggests investment fund Merian North American Equity, praising its ‘highly experienced team’.
He adds: ‘The team effectively follows the money – ascertaining what type of stocks other investors are buying and then purchasing the best ones in those categories.’
The fund holds 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 large US tech firms – only Amazon of the big tech stocks is among its top 10 holdings.
Darius McDermott is managing director of Chelsea Financial Services. He rates investment fund AXA Framlington American Growth that is more tech focused than the Miton fund – the top five holdings are all tech companies and represent 26 per cent of the portfolio.
Risks: Company valuations are now so high, and economic prospects so gloomy with the pandemic far from over
He adds: ‘Manager Steve Kelly believes that when the global economy emerges from lockdown, inflationary forces are likely to remain low and the pace of economic growth will be subdued – an environment in which innovation will be key and technology companies will continue to thrive.’
For those looking for exposure to US smaller companies, McDermott recommends Federated Hermes US SMID Equity.
According to manager Mark Sherlock, McDermott believes that if the US brings more manufacturing home, smaller companies could be a big part of the resulting reconfigured supply chains.
Finally, for income-seekers, he recommends fund JPM US Equity Income. McDermott says: ‘Despite the naturally lower yielding nature of the US market, it has a long history of dividend payments.
‘This fund has healthcare company Johnson & Johnson as its second largest position – a so-called dividend aristocrat that has increased its annual dividends for more than 25 consecutive years.’
Whichever US investment fund you choose, you must watch the news – especially Trump’s Twitter account – in the coming months.
The land of the free it may be, but with so many variables hanging over company valuations, America is very much home for the brave investor.
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