The transition from over-priced bonds to attractively valued equities will be the key asset allocation switch of the next few years and will see money flood into US equities, according to Neptune’s Felix Wintle.
Wintle, the group’s head of US equities, said that when the transition to equities occurs, which could be imminent or in a few years’ time, the US market will be the initial beneficiary.
‘The bond-to-equity switch will be the mother of all asset allocation changes,’ he said. ‘It’s got to happen, we are at the end of a 30-year bull run [in government bonds], and equities are superb value. They also offer very attractive dividend yields. Flows will come to the US first; it’s the biggest market.’
Despite immediate headwinds in the form of the presidential elections and potential fiscal cliff, strong fundamentals support the bull case for US equities, which should spur the market to continue to outperform.
‘US corporates have never been in better shape,’ said Wintle. ‘There will also likely be independence of energy supply in the US – they are gas guzzlers, the biggest consumers in the world – and I don’t see that changing. ‘If they can achieve energy independence, then that’s a massive bullish point for the economy over the next decade.’
He explained there are a number of companies ‘re-shoring’ and setting up in the US, as wages and the cost of manufacturing increases in China and other developing markets.
US develops into a dividend market
Rebecca Young, manager of the Neptune US Income fund, said although the US has not traditionally been perceived as a market for equity yields, it is now increasing its dividend payments, which grew at 16% last year and are expected to grow 15% in 2012.
‘Corporate profits are at $2 trillion, near record levels,’ Young said. ‘These companies were efficient during the downturn, and now they’re expanding.’
She said US companies are ‘swimming with cash’, with 14% of all assets across companies held in cash, leaving them well positioned to pursue merger and acquisition activity, reinvestment and increase their dividends.
‘A lot of companies are also paying dividends for the first time, for example, Apple,’ said Young. ‘And it’s not just utilities and telecoms, some of the more cyclical sectors, such as energy, will see the fastest rates of dividend growth. So earnings growth and dividend growth are, from a total return perspective, looking increasingly attractive.’
Threat of fiscal cliff overdone?
Despite concerns that the impending fiscal cliff at the start of next year could wipe off as much as 5% off GDP, James Dowey, Neptune’s chief economist, believes fears are overblown.
‘There is too much fuss about the fiscal cliff right now,’ said Dowey. ‘It’ll be ugly, but there shouldn’t be too much focus on it.’
He believes it will deliver a drag that will take around 1% to 1.5% off the first quarter GDP, which is ‘manageable,’ emphasising it is important to not be ‘too conservative’ while ensuring you are conservative enough.
‘It’s clear the US is accelerating following a rough patch in the summer,’ said Dowey. ‘It’s running at around 2% GDP growth at the moment, and consensus view is 2% for next year, although that should be pretty easy to beat.’
However, he added: ‘If consensus growth forecasts go up to 3% for next year, I’d be cautious.’
In contrast, Russ Koesterich, global chief investment strategist at BlackRock’s iShares, believes the fiscal cliff ‘is a big deal,’ as the hike in taxes and spending cuts is estimated to amount to $800 billion, or 5% of US GDP.
‘The challenge with the fiscal cliff is that it is large, but it is also its composition,’ said Koesterich. ‘It will hurt in a number of ways. Several hundred billion dollars of additional taxes will hit consumers, who have a high level of debt and low income.’
He added: ‘If we have a fiscal cliff, we will suffer at least a mild recession in the US in 2013.’
Over one year, Young has delivered 19.4% on Neptune US Income, outperforming the benchmark’s 17.9%. On US Opportunities, Wintle has delivered 14.8% over three years, versus the benchmark’s 42.4%.