Four things to know about US equities
By Christian Preussner, US Equities Chief Client Portfolio Manager, JP Morgan Asset Management
Many investors are wondering if they should stick with US equities. We believe there are four compelling reasons to do so. To take a pulse of current market conditions: it is a more mixed earnings season in the US so far, but 72% of companies are currently beating estimates. We’re relatively optimistic on modest underlying economic growth of 2.5% GDP growth this year.
At this stage in the cycle, we would highlight the need to focus on sectors and companies, particularly cyclicals where we see opportunities.
There are four main themes currently driving US equities:
1) Energy: it’s impact on earnings and consumers is varied
2) Currency effects: strength of US dollar is hitting earnings, but the impact is different at a company level even for predominantly international companies
3) Earnings perspective: strong outlook when you exclude the energy sector
4) Valuations: not cheap but not expensive
Energy – negatives and positives
The energy sector makes up around 12% of overall S+P 500 2014 earnings and those earnings are expected to drop by approximately 50% in 2015, in reaction to the halving of the oil price since the middle of last year. We are therefore cautious on the energy sector and are actively seeking companies and sectors are meaningful beneficiaries of lower oil prices, such as airlines.
There have been concerns about the impact of falling oil prices on the US employment picture, but the energy sector accounts for only approximately 3% of new jobs created since 2010, so we would not expect this to halt momentum in the US jobs market.
Broadly the more cyclically oriented sectors, with the obvious exception of energy, are experiencing positive impacts from lower oil prices.
Currency – not an even playing field
Foreign sales exposure is a significant issue for major multinational companies that have international revenues impacted by the stronger US dollar. For example, information technology has about 60% of earnings from outside the US and materials about 50% outside the US, as an investor might expect the stronger greenback to hit the earnings results for these companies.
However, if you drill down to the stock level in the information technology sector, for many companies the earnings are factored in US dollar currency as opposed to local currency, significantly limiting their exposure to currency translation effects.