Don’t overlook mid-cap investment opportunities
When different areas of investment are compared, they are often different assets like equities vs...
It’s Independence Day this weekend and, while many people in England will be heading to the nearest pub after nearly four months of lockdown, Americans would normally be focusing more on family and community gatherings, eating hotdogs (some 150 million if past years are anything to go by) and fireworks. This year, events in some States are likely to be significantly scaled down however, as virus infections continue to rise.
But it’s cheerier news for investors in the US stock market. Over the past 10 years, US shares have led the way: the S&P 500 has returned 293.1%* over the past decade and the tech-heavy NASDAQ has posted gains of 509.9%*. This compares to 176.7%* for the MSCI ACWI world index and just 86.8%* for our own FTSE All Share.
Even the global pandemic has not been enough to stop the charge. Again, while the UK stock market is still down 17.6%** year to date, the world index is almost back in positive territory (-1%**), the S&P 500 is up 0.85%** and the NASDAQ – which is full of companies that have been able to keep trading in lockdown – is up 19.8%**
But as we head into the second half of the year and an election, what does the future hold in store?
The US stock market has staged a remarkable recovery in the past three months – particularly its tech stocks. But FundCalibre’s major concern – given all the uncertainties over recession and continued infections – is that, in the short term, the market has come back too far, and it wouldn’t surprise us if we have another down-leg, before a longer, more sustained recovery takes hold.
Longer-term, there are reasons to believe the US market can remain strong. If you believe in a low growth, low interest rate, low inflation world, it’s likely tech will continue to do well. It’s also hard to believe tech is going to be any less important in our lives, so these companies could lead the way for some time.
And, no matter who wins the election in November, anti-Chinese policies are also likely to remain, which means we may see manufacturing coming back to the US, and smaller companies benefitting from this reconfiguration of the supply chain – as Mark Sherlock, lead portfolio manager of the Federated Hermes US SMID Equity fund mentioned in his Investing on the Go podcast.
Bob Kaynor, manager of the Schroder US Mid Cap fund and Hugh Grieves, manager of LF Miton US Opportunities, also believe the prospects for US smaller and medium-sized companies are more positive today – with both managers topping up on businesses in this area of the market during the recent sell-off. And so far they have been proven right: the Russell 2500 index of smaller companies has returned 32.6%^ since the March lows, 6.5%^ more than its larger peers in the S&P 500.
You can hear more about this in their podcasts: episode 58. Why the US stock market may have already bottomed and episode 64. US mid-caps: planting the investment seeds for the large-caps of tomorrow.
At this stage, it is hard to quantify the exact extent of the damage to the economy. Jobs numbers surprised in May, but there are still millions of unemployed. These people also face a cliff edge at the end of July, when emergency welfare will fall from nearly US$1,000 a week to the pre-coronavirus level of US$378. The fear is that consumer spending will then plunge. Yes, there has been a build-up in savings during the pandemic, as there hasn’t been a lot to spend money on, but a sudden two-thirds drop in income will surely put the brakes on the consumer.
There is also the ongoing pandemic to consider – in a number of States the number of cases is still rising and a second lockdown in some areas is not out of the question. This increases the possibility of more companies going bust.
And, as Chris Higham, manager of Aviva High Yield Bond fund pointed out to us, the challenge for managers at this point is which companies get support and which don’t. So far policy makers have been supportive and are buying both investment grade and high yield bonds from companies, and Chris believes that if the situation gets worse, there is likely to be more support. But default rates will inevitably go up and he believes there will be more in the US than in Europe, which has higher quality bonds and more left-wing/socialist governments.
But all things considered, most investors should have some US equities in their portfolio. It’s the world’s largest economy and home to many industry leaders. It’s just too much of an important market to ignore.
*Source: FE Analytics, total returns in sterling, ten years to 26 June 2020
**Source: FE Analytics, total returns in sterling, 1 January to 26 June 2020
^Source: FE Analytics, total returns in sterling, 23 March 2020 to 26 June 2020