US shares can’t be ignored – even if they are pricey – Citywire.co.uk

Investors are cutting back their bets on US shares, or equities, as the market becomes increasingly expensive after a strong rise – but there are still pockets of value.

While investors aren’t putting their money into US stocks with the same gusto as they have been in recent years, wealth managers still point to the need for a decent chunk of exposure to the world’s largest economy in any well diversified portfolio.

Strong gains

Concerns about the lack of value in the US market come after a 59% run higher on the S&P 500 share index over the past five years. That’s well above the 34% rise on both Britain’s FTSE 100 and the MSCI Europe index. Emerging markets have gained just 5% during that time for British investors.

The gains reflect the US’s earlier economic recovery and coinciding concerns about the prospects for shares elsewhere. For a while now though, braver investors – with an eye for a bargain – have been buying shares in Europe.

A recent survey by Bank of America Merrill Lynch showed that fund managers’ allocations to US equities fell sharply to the lowest level in seven months in September – though they remain 9% overweight (albeit compared to 32% the previous month).

Measuring value

There are several ways to measure the dearness or otherwise of the market. Jonathan Bell, chief investment officer of Stanhope Capital, which invests money for wealth families and charities, says on a ‘price to book’ basis US equities are slightly expensive compared to Europe on an historic basis.

Using CAPE, which measures cyclically adjusted price to earnings ratio (P/E), the US market is much more expensive than Europe.

‘Earlier this year US equities outperformed Europe by a considerable margin. In the last two months the pendulum has swung back with Europe outperforming by close to 8% in two months. We feel this outperformance has further to go,’ says Bell whose firm is ‘underweight’ the US market.

These ratios arguably show that any economic advantage is baked into share prices. The US is widely deemed to have managed to recover faster than the rest of the developed world by supporting growth rather than punishing austerity.

Other reasons to leave

In fact, concerns over US policy are now deterring investors. Uncertainty over when the US will start reducing the scale of its stimulus programme – in which the Federal Reserve spends $85 billion (£53 billion) a month on buying bonds – may be partly behind a move out of US shares in the summer.

‘As QE comes to an end it will be beneficial for the US dollar but detrimental to US equities,’ says Bell.

The Fed unexpectedly refrained from scaling back its stimulus earlier last week as it cut its outlook for US growth. This ‘injects a bit of caution’ for investors, said Simon Brett, chief investment officer at Parmenion, which provides investment services for financial advisers.

The beginning of the end of QE will tie in with further improvements in the global economy.

In that environment, says Noland Carter, chief investment officer at wealth management firm Heartwood, investors will seek riskier markets than the US.

‘We are constructive about the global economy,’ he says, ‘if confidence comes back, the US stock market does not lead in those sort of environments’.

Long-term strength

While Carter’s firm have ‘taken a little bit off the table’, cutting back a long-held overweight US position in client portfolios, he sees long-term drivers for US stocks and remains ‘constructive’ on the market. He points to the development of fracking and the cost advantages that the emergence of shale gas provides to the US. This has hastened a trend towards US companies returning their operations from overseas – known as ‘onshoring’ – alongside the recovery in the financial sector stateside.

In the ‘balanced’ portfolios that Heartwood manages for clients 26% of the holdings in shares, or equities, is in the US. That’s below the firm’s definition of a ‘neutral’ position, but still a high exposure, Carter points out. They are also invested in the US dollar and inflation-linked US government bonds, or treasuries (TIPs).

Heartwood’s US equity holdings – which are solely in passive, index-tracking exchange traded funds (ETFs), not in actively managed funds – include specific investments in the technology and financial sectors. ‘The main value area is predominantly in the financial sector,’ says Carter.

Parmenion’s Brett agrees that US shares are expensive, but again emphasises that ‘you’ve got to have a presence’ in the largest and most developed equity market in the world.

Like other investment professionals, Brett believes shares in Europe look better value.

For fund ideas for investing in the US, see this article: How to invest in the US