In this analysis, Tom Stevenson, Investment Director, Fidelity International, considers three funds for investing in the US from Fidelity International’s Select 50
America’s Thanksgiving will be a time for celebrating the positives of the past year, but also, perhaps, a time to ponder what lies ahead. The aftermath of the US election has certainly given markets plenty to think about, both in terms of the future economic landscape and America’s place in the world.
The “Trump Bump” seen across stock markets has, so far, been almost entirely confined to US shores. Foreign markets are, quite rightly, in the process of assessing potential trade tariffs, which could risk downturns in their home economies. For its part, America has momentum on its side, something most overseas markets currently lack.
Commenting on the investment outlook for the US, Tom Stevenson, Investment Director, Fidelity International, said: “The US economy certainly looks well primed and ready for growth, having expanded at a 2.8% annual rate in the third quarter after recording 3% growth the quarter before1. The economy has shown itself to be resilient in the face of shocks, supported by a sharp fall in inflation and a generally healthy labour market.
“The big question is whether the market optimism will soon fade. It might, but what will be important will be the President-elect’s approach over the next four years. As ever, there are risks, and US stock market investors have been required to contend with high valuations for much of the past year. That hasn’t changed since the election and European markets look cheap in comparison.
“Recent trading sessions in New York suggest the Trump Bump could quite easily fade. There’s a renewed fear around the reduced likelihood of an interest rate cut, which is no longer a foregone conclusion. Moreover, future tariffs will likely impact US consumer companies through higher input costs.
“The bond markets present another challenge. The cost of borrowing –as measured by 10-year Treasury yields – has risen to around 4.4% from around 3.7% in mid-to-late September2. Another factor worth bearing in mind is the strength of the dollar. Despite a 0.75% reduction in interest rates since September, the dollar has soared over the past month. While this will help to keep import prices down, it will hurt exports and the earnings of American multinationals.
“Despite these challenges, it’s hard to ignore the underlying strength of America’s corporate sector, or that the country has skirted a recession without the assistance of a sustained period of lower interest rates. Company earnings are currently expected to grow by around 9% this year and 15% next3. These factors support the case for a continuation of the current bull market. At just two years old, it remains relatively young.”
In the face of uncertainty, staying diversified still constitutes a sensible investment approach. Fidelity’s Select 50 list of favourite funds contains several ideas for investors that capture a diversified US exposure but each with a strong style bias.
Tom Stevenson considers three funds for investing in the US from Fidelity International’s Select 50: “The Brown Advisory US Sustainable Growth Fund is one example. Fidelity’s experts favour this fund for its experienced management and the strong pool of company analysts it draws on. The fund is mostly invested in larger companies with a durable competitive advantage and steady rather than necessarily rapid growth. It also has a focus on quality.
“This is a reasonably concentrated growth portfolio of between 30 and 40 holdings in companies worth $2 billion or more. It is, however, by no means a carbon copy of the market, with just four of America’s “Magnificent Seven” tech companies in its top-10.
“If you prefer an approach centred on shares that rank highly in terms of value, the Dodge & Cox Worldwide US Stock Fund may be more to your liking. This is another relatively concentrated fund, but here the manager tends to adopt a contrarian approach, often buying companies with depressed share prices. As such, it would likely blend well with the Brown Advisory US Sustainable Growth Fund.
“The Fund’s value bias is reflected in a low forward earnings multiple of 14.7x and trailing dividend yield of 1.8% as at the end of September. The same metrics for the S&P 500 Index were 22.5x and 1.3% at the same date4.
“Finally, smaller US companies may well be swept higher by the Trump tide as they tend to earn a greater proportion of their profits from the domestic economy. The Brown Advisory US Smaller Companies Fund, also on the Select 50, targets a concentrated portfolio of smaller companies with above-average growth, sound management and competitive advantages. Brown Advisory is based in the US and has an extensive team researching and investing in smaller companies, important factors when it comes to this asset class.”
