Why Investors Should Have Exposure to US Equities
Why Investors Should Have Exposure to US Equities
By Felix Wintle, Head of US Equities and
Manager of the Neptune US Opportunities Fund
There are many reasons why investors, particularly those based in the UK, should have exposure to US equities. This is not a consensus view and indeed many money managers in the UK have been underweight in the US going back as far as the dotcom bust. In this article I will look at the reasons why investors should, in my view, always have some exposure to US companies and why now is a particularly prescient time to start building exposure.
• The first reason I believe that UK based investors are so well placed to be buying US stocks right now is because the dollar is so weak. When the dollar is weak against the pound it means US stocks are "on sale" to UK investors and this offers a great opportunity for UK investors to pick up stocks cheaper than they would normally be.
• The second is that the US is leading the world out of the recession. The Federal Reserve's speedy interest rate cuts during 2008, which started in January and took rates from 4.25% to 0-0.25% showed the rest of the OECD economies what they had to do; the UK and the ECB eventually following suit in September.
• The stimulus package that was passed in the second half of 2008 was also crucial in getting demand back on track and pulling the global economy back from the brink. The package was mirrored by many other major economies, most importantly China. China's $500bn program has been the one boosting stockmarkets around the world as it has been their package that has been stimulating demand so far. The US package will be primarily a 2010 event.
• The election of Obama was also very important as it came at a time when investors and American voters were in despair and a change of leadership was a real fillip. The market rallied from Obama's victory in early November into January.
So if the US is leading the world out of recession, what is the best way to get exposure to this idea? At Neptune we strongly believe that the best way to get good returns out of the US market is by using our top-down global investment process first and then picking stocks. Having a top-down process is absolutely crucial in today's markets because so much is dependent on what happens at the macro level. That macro level is dominated at the moment by the US and China and it is the relative economic prospects of these two countries which move markets. We first make the macro call and then we look at the ten MSCI industry sectors in the US and determine which ones are likely to benefit from the prevailing macro outlook.
The S&P 500 belies the opportunities available to investors. Many sectors have significantly outperformed the index. The S&P is not the whole US market and there is a wealth of interesting stocks outside of it. The S&P has 500 stocks, the highest weighting of which is Exxon Mobil at approximately 4%. This means that over three-quarters of the index is made up of stocks accounting for less than 1% of the index, while the smallest stock is 0.11%. With such diversification the good stocks are diluted by the bad stocks and little progress is made. This is the reason that some investors view the US market as somewhat moribund or even ex growth. It is neither of these things. Just look at the phenomenal success of Apple's iPod and iPhone, products which went global in a matter of months. Think of Google and Yahoo which were started by two guys in garages 15 years ago and are now multi-billion dollar businesses. Innovation is alive and well in America and it is this innovation and the entrepreneurial spirit that will keep the US at the forefront of invention.
The US is also in the enviable position of having many global leading companies across all industry sectors. You can pick any global industry sector and look at which companies dominate that particular industry and you will see several examples of big, listed, liquid American companies. Take agriculture for example: all but two of the fertiliser companies are American, as are all the equipment makers, like John Deere and AGCO, while the world's largest seed company is Monsanto. No matter what the investment theme, there is always a US company to invest in.
To summarise, investors should always have some exposure to US companies. Do not be fazed by the sometimes lacklustre performance of the S&P 500 or the Dow, as these indices belie the true opportunities. Furthermore, the dollar is cheap against the pound, making now a great time for sterling based investors to get exposure to the US. However, we strongly believe that a top-down approach like that used by the Neptune US Opportunities Fund is vital in getting good returns from the US market.
This article is for Professional and Eligible Counterparties only and is not for forward transmission. Retail Clients should not rely on the contents of this message or its attachments. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are the analyst's personal recommendations and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. Issued by Neptune Investment Management Limited, One Lyric Square, London W6 0NB. Authorised and regulated by the Financial Services Authority FSA registration number: 416015.
For further information, go to www.neptune-im.co.uk
