Good banks, good growth, good opportunities in US, says Threadneedle

Cormac Weldon, Threadneedle’s head of US equities says that portfolio positioning reflects growing confidence in the region.

We believe there are plenty of reasons to be optimistic about the US market and we have positioned our portfolios to reflect this growing confidence. First of all, data has shown that a rise in employment growth is being driven by a recovery in the industrial market. In turn, much of this industrial upturn is being supported by energy opportunities in the US – a factor that we expect to remain in place over the medium term – as well as the domestic relocation of industrial capacity such as auto plants.

Stock specific opportunities blossoming

Following a decade of poor returns when investors effectively gave up on US equities we have identified a host of investment opportunities, with many companies looking very attractively valued and displaying strong growth prospects. Finally, the US also possesses one of the necessary conditions for a good economy: namely a healthy banking system.

Housing becoming more affordable

The employment growth we are seeing leads us to conclude that five years after the peak in the housing market, and after a lot of pain, we can at last see an end to the housing overhang. That’s not to say the end is imminent, but there is a good chance it is going to happen in 2013, and from there a more normal market will emerge. As has already been well documented, there have been significant delinquency problems with housing loans made in the mid-2000s. This situation has reduced over time and, although there is still an element of inventory overhang, the market now looks more affordable than it has for a number of decades (‘affordability’ is calculated by taking the price of an average home and dividing it by the average wage).

New households also driving the housing market

Another market driver is household formations – in other words, the creation of new households. Supporting this market are young people leaving home or couples getting married (or indeed divorced). We expect that, as house prices stabilise and the employment picture improves, household formations will see an upturn and that this will create new demand. Our view has consistently been that the market also needs the human element to propel the recovery: people need to be confident in their earning power and they must be convinced that the asset they buy won’t fall in price. These factors are increasingly falling into place.

US banks’ deleveraging largely accomplished

On a range of measures, we can see that deleveraging has effectively taken place in the US banking system. This is a very important development, because the banking system is a vital transmission mechanism within the economy, and deleveraging was needed to fix the faults in that mechanism. Consequently, growth can now take hold in the US, especially in the form of capital investment. In fact, we are already witnessing a big rebound in capital investment, a cycle that we expect will continue for some time. By contrast, in Europe deleveraging has not yet started in any meaningful way and this will be a major impediment to European growth over the medium term.

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