Fourth of July celebrations will be in full swing across the pond today but it’s not just Americans who will feel like raising a glass to the US this year.
Global investors attracted to the world’s biggest economy will be buoyed by the major US indices hitting all-time highs in a shortened trading session yesterday. Tech stocks, key beneficiaries of any signs of cooling tensions between the US and China, led the way in the S&P 500 with consumer staples following suit - lifting the index 0.8%, with the Dow Jones and NASDAQ performing similarly.
But it hasn’t been the most comfortable journey to the top - the S&P fell by 14% in the final quarter of 2018, only to spring back by 18.3% year to date1 in 2019. So, investors who kept a cool head before Christmas have been rewarded for their patience but with so many market and geo-political variables still on the table, is their renewed optimism justified?
At first glance, yes. A decade on from the last recession the US economy looks stable and shows no clear warnings of a persistent slowdown ahead. US GDP hit 3.1% annualised in the first quarter of this year, up from 2.2% the previous quarter, and while US equities might look expensive relative to other markets, some will see this as justified, given higher US growth.
However, the performance of consumer staples stocks like Procter & Gamble this year shows us the mood isn’t entirely positive. With interest rates at record lows in recent years, many investors wary of volatility have moved into these types of companies, looking for high quality businesses, with dependable revenue streams and dividend provision, as opposed to cheaper value stocks.
While this strategy will have done very well for many, with bond yields unattractive the outperformance of this sector is still seen as a proxy flight to safety - meaning investors are still seeking protection from the volatility they saw at the end of last year.
There are a few reasons for this. Perhaps chief among them is the ongoing US-China trade war dispute. Tech stocks bouncing on the back of an apparent temporary détente between the nations is a clear signal of how significant the tariff war is for the sector. Trump has also brought India, the EU, Canada and Mexico into the conversation as well as stoking an uneasy relationship with North Korea - one reason for caution among many investors.
And then there is the Fed, whose hawkish-dovish to and fros are becoming increasingly difficult to read with any certainty. In late 2018, it had signalled further rate rises but now expects cuts instead. What’s more, it has been difficult to ignore the open critiques of Jerome Powell, mainly from a specific presidential Twitter account.
So, while the US might be leading the charge in global market performance, the swing in market sentiment we have seen in the first half of 2019 and the unease with which many view market highs show plainly the benefit of adequate diversification. Even those with a staunch loyalty to US markets can find a portfolio with weighted exposures to the benefits of North American companies while maintaining a blend of international assets.
A brief look at the top holdings in James Thomson’s Rathbone Global Opportunities Fund gives a clear indication of the manager’s belief in the future of US technology. Despite share price pullbacks last year, the manager is happy to keep around a quarter of the fund exposed to the sector, making clear selectivity and diversification are key.
Thomson explains: “Tech is mission critical for some businesses and this perhaps is what has changed over the last decade. Being at the leading edge of new technology and staying relevant for the next wave of customers really is a top priority for every corporate CEO.”
Five year performance
As at 30 June
Past performance is not a reliable indicator of future returns
Source: Refinitiv, as at 30.6.19, in local currency terms
1Bloomberg, as at 1/07/2019, price change, not total return
|Tom Stevenson’s Investment Outlook webcast – 10 July 2019 at 12pm|
|This Wednesday, Tom Stevenson will be giving his outlook on world markets in a lunchtime webcast.
Login here to watch it live at 12pm on 10 July 2019.
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