Stephen Anness, Head of Global Equities, UK at Invesco gives his view on why the US market remains attractive for investors ahead of July 4th celebrations.
All major markets around the world face a range of challenges and whilst it is easy to identify weaknesses in the US social and governance structures, such as income inequality and the dysfunctionality in politics, we would contend it remains an attractive market for equity investment despite stock valuations that often are at a premium to other regions.
Which areas of the US market are you most excited about?
Given the recent sell off there are several areas which strike us as more interesting. Certainly there are parts of the tech sector which now look far more attractive from a valuation perspective- our concerns weren’t necessarily the long-term growth rates of these businesses but the valuations attached.
I would also make the argument that from a size perspective ‘smaller’ companies appear to be oversold at such levels- companies in the $3-20bn range. Many of these are great businesses but become oversold in a market sell off; they tend to be a little more off the beaten track.
Which sectors or companies are well-placed to navigate, or even thrive, in the inflationary environment?
Unsurprisingly we want to invest in businesses which have high levels of pricing power and prefer high margin to low margin businesses. At a time like this balance sheet strength will be important as often strong companies can use financial firepower to invest in a downcycle to emerge stronger.
Has the bear market presented any interesting buying opportunities? Have you recently added any US names to your portfolio?
Most definitely. Whilst a bear market feels horrible it is something of a necessary evil- it does create opportunity for us to deploy capital into new and existing holdings at attractive prices. We have recently initiated a position in Nvidia which has fallen around 50% from the highs of late 2021. We have also recently added to our position in Herc (an equipment rental business) which has underperformed on expectations of a slowing US economy.
Bear markets tend to be much shorter than bull markets – which areas of the market stand to benefit when the market begins to recover?
This bear market has been driven by increasing interest rates and more recently concerns about economic growth. For markets to recover we are likely to need to see inflation expectations brought under control.
Many companies which are exposed to housing and consumer spending have been hit hard along with semi-conductors and certain areas of tech. If inflation expectations are tamed such that the market can price in peak interest rates I would expect those sectors to perform well in a rebound.