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16 May 2016

The case for investing in the US

By guest contributors, Legg Mason

The US remains the world’s single largest economy. Indeed, at the end of 2014 its nominal gross domestic product (GDP) was more than US$17.4 trillion, according to the World Bank. That’s more than the total GDP of France, Germany, Japan and the UK put together.

Furthermore, the International Monetary Fund expects US GDP to grow by 2.6% over the next year – some way ahead of most other developed markets. Little wonder then that UK and European investors are interested in investing there.

There are a number of positive factors underpinning the positive US growth story. The economy, for example, is steadily recovering, inflation remains muted and interest rates are finally beginning to normalise. But a stronger economy is only part of the story.

The US is also the world’s biggest stock market. It’s home to some of the world’s largest global brands such as Apple, Facebook and Microsoft. At the other end of the spectrum, it also provides access to smaller companies operating in exciting, innovative new industries.

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Lean and competitive

The last few years have been tough for global investors. But many US companies have emerged from the global financial crisis leaner, more competitive and more profitable than they were before. Indeed, low debt levels, healthy balance sheets, merger and acquisition activity, share buybacks and increasing dividends have all helped to boost returns for US shareholders.

US equity funds can therefore add value as the cornerstone of an investment portfolio. And the sheer size and depth of the US investment universe provides good opportunities to generate returns throughout the economic cycle. US funds can also generate income.

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Over the last few years, in the wake of the financial crisis of 2007 and 2008, investors around the world have been struggling to find pockets of sustainable income. But as corporate America recognises the needs of an ageing population to pay and raise dividends, the US has become a popular hunting ground.

The US is home to a multiplicity of funds and strategies, ranging from simple index tracking or ETF strategies to more esoteric absolute return funds that have the ability to short stocks. We favour stock picking funds that invest in well managed, profitable companies that have a distinct advantage over the rest of the market.

Where larger companies lead, smaller companies often follow. So we also like US smaller companies, which invariably have a good track record in times of slower economic growth. This is because they are able to cut costs quickly during downturns and they have the potential to grow their earnings more quickly than larger companies during more profitable periods. If the US economy is turning more positive, as we believe, the small-cap market is likely to benefit.

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Looking ahead

In terms of the current US macroeconomic environment, there are a number of positive signs. Rising US employment and pay, for example, suggests a healthy environment, where workers are sharing in the US economic growth. Indeed, consumer balance sheets continue to improve.

The US housing market also continues to improve with a shift from those looking to purchase a larger home to those looking to purchase a starter home. This indicates that lower income workers are sharing in wage gains.

To conclude, a slow but steady US economy coupled with accommodative Federal Reserve policy will probably keep interest rates lower for longer. By investing in quality US companies, investors should be able to preserve capital should volatility return to the markets, while having the potential to post solid returns should the market continue its advance.

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Legg Mason's views are their own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.