Catching the ripples

There remains considerable debate about whether US equities are now overpriced.  Year to date in Sterling terms, the US market has risen just 3.4% compared with Europe – up 7.4% – the UK not far behind that, and Japan and Asia delivering currency-fuelled gains of above 6%.  Is this a sign of a bull market peaking in North America?

Whilst no longer considered cheap relative to history or other parts of the world, our view is that the US recovery continues.  Positive factors such as oil price weakness should boost consumer expenditure, and we are seeing outperformance from many of the domestically orientated sectors.  We see no sign of the US dollar weakening yet, so we continue to support the consensus view of being overweight in the US and dollar assets – for now.

However, having made significant returns in North American equities last year, we now need to start to look for the next success story.  One market that still offers reasonable value is Asia.   Our expectation is that as well as having higher growth rates versus developed economies, the region should benefit from the US recovery trickling down to its big trading partners.

For investors who are late to the US story, this is arguably a way of catching some of the ripples.  At current valuations you are paying less for potentially greater growth, albeit investors need to be selective.  Our preference is for China and India, whilst we want to avoid Asia Pacific countries with a strong commodity bias – a reason why we currently have low or zero exposure to Emerging Markets like Latin America, Russia and South Africa.

As for the UK, we tapered our enthusiasm last year, partly on concerns around political uncertainty but also because we saw greater opportunities overseas, such as in North America.  We must be careful not to be blinkered into thinking politics is the driving force behind equity market returns. In fact – returning to our earlier analogy – the UK may be in a prime position to catch the positive ripples from the quantitative easing programme in Europe.

Rosie Bullard Portfolio Manager, James Hambro & Partners

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