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High valuations and low economic growth leave managers divided on US

High valuations and low economic growth leave managers divided on US

The US has had a year of political upheaval, but Will McIntosh-Whyte, assistant fund manager at Rathbones, is ‘sanguine’ about its economic prospects. McIntosh-Whyte helps run multi-asset portfolios, including the Rathbone Strategic Growth fund, and has significant exposure to the US.

‘We are in a relatively low-growth environment, which I think is structural, given demographic and debt levels,’ he said. ‘So growth is going to be fairly muted and we think a premium will be put on that. Consequently, we want structural growth companies in our portfolio with strong balance sheets that we think can grow throughout the cycle. We find a lot of those in the US.’

McIntosh-Whyte added the US economy also looks set for reasonable continued growth. ‘Consumer confidence is reasonable and wage growth is OK. But the US is where we find companies we like to invest in.’ Such companies include Colgate-Palmolive, Visa and regional US banks.

Domestic doubts

McIntosh-Whyte is less confident about the UK domestic market. Indeed, the Rathbone Strategic Growth fund only has 14% exposure to UK equities. ‘The economic data seems to be deteriorating,’ he said. ‘I think consumers are under pressure, gross domestic product is muted and there is uncertainty over Brexit.’

However, not all multi-asset managers are overweight the US. Citywire + rated Simon Evan-Cook, senior investment manager of Premier multi-asset funds, said: ‘We are driven by the valuation of the assets rather than economics, politics or other macro factors.

‘For us, valuations across US equities look very high compared with their own history and with other parts of the world.’

Consequently, Premier’s multi-asset funds have little exposure to US equities. ‘A classical global equity index will have about 55% to 60% in US equities,’ said Evan-Cook. ‘In our Global Growth fund we have just shy of 6% directly in US equities.’

Alternative options

By contrast, the Premier Multi-Asset Global Growth fund, which consists of 90% equities, is overweight in Asia and emerging markets, with around 30% of assets there. Evan-Cook said this was because he has a positive outlook on the Chinese market and felt equities there were undervalued.

‘Currently, a fear of a Chinese crisis means you can pick up Asia equities for a reasonable valuation, given the growth profile many offer,’ he said. ‘Our regional managers seem quite confident China has enough firepower to avoid a crisis in the foreseeable future. It is a situation we will continue to monitor.’

Mark Jackson, client portfolio manager of JP Morgan’s multi-asset solutions team, said his traditional balanced portfolio has a benchmark of 50% equities and 50% government bonds. But, at the moment, the fund holds 69% equities, driven by an optimistic view of global macro-economic growth.

Regarding fixed income, Jackson said the JP Morgan multi-asset range prefers credit to government bonds, particularly given an expectation of further interest rate rises. ‘Our expectation moving forward is inflation moving closer to central bank targets and rates moving gradually higher from here,’ he said.

‘We believe the US Federal Reserve will hike in December. Gradually, a rising rate environment will create some challenges for the fixed income market. But in fixed income, we would have a preference for credit. Corporate balance sheets are in good shape and we think that is a good opportunity for credit.’

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