Despite the S&P 500 recently reaching record highs and Apple’s market value topping $2trn for the first time, US tech-driven market rallies are showing signs of easing. But how are investment company managers viewing the market, what is their outlook for technology and how are they positioning their portfolios ahead of the upcoming presidential election?
On Tuesday 8 September 2020, the Association of Investment Companies (AIC) hosted a media webinar with Paul Niven, Manager of F&C Investment Trust, Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust and Fran Radano, Manager of The North American Income Trust, to discuss the US market, the implications of the election and their outlook for the US.
Their views have been collated alongside comments from Jonathan Simon, Manager of JPMorgan American Investment Trust, Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, Robert Siddles, Manager of Jupiter US Smaller Companies and Tony DeSpirito, Co-manager of BlackRock North American Income Trust.
How could the election affect your portfolio?
Robert Siddles, Manager of Jupiter US Smaller Companies, said: “The prospect of a Democratic clean sweep should make investors nervous – this has not happened since 1992 (although that lasted only till 1994 when the Republicans regained the Senate). Higher corporate taxes and tighter labour regulation would adversely affect corporate profits. Having said that, the US system is very different from the UK or Europe and resulting policies may be diluted: the US is run by business interests and politicians interfere with this at their peril. One positive of Democrats in government, however, is that they tend to spend a lot, which is good for the economy in the short term at least. We are trying to make sure that companies in key areas that are affected by government regulation, such as health and education, are closely aligned with public policy.”
Fran Radano, Manager of The North American Income Trust, said: “The betting markets, which have proven to be much more accurate than polls, continue to forecast a victory for Democratic Party candidate, Joe Biden, albeit with narrowing odds. Nearly equally important for the Democrats is the ability to wrestle control of the Senate away from the Republicans if they want to be able to implement their platform. If both of these events were to happen, you would expect higher taxation on both corporations and high net worth individuals. Additionally, increased regulation in the financial, energy and utility sectors is likely. Conversely, a Biden Presidency would likely entail more favourable outcomes for both global trade and immigration which are important for the long-term health of the economy.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “The US presidential election will certainly be an important focal point for markets in the short term, and remains a highly uncertain outcome at this stage, even if polls are showing a gap opening up between both candidates. The likelihood of there being a long, drawn-out process to determine the eventual winner is also a distinct possibility. Disputes over election procedures and vote counting could once again be decided by the Supreme Court, meaning the next US president may not be known until late in 2020.”
Where are you seeing opportunities?
Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, said: “We are excited about cloud-based infrastructure platforms such as Stripe, Shopify, Amazon Web Services (AWS) and Twilio. These businesses are helping to lower barriers to entrepreneurship. Instead of investing vast sums of money up-front in building data centres and other types of infrastructure, companies can rent access via these platforms. For example, through Shopify online retailers can gain access to all the tools they need to run their business, from order management to fulfilment. Twilio enables its customers to build communications functionality into their applications without the need for relationships with telecoms companies or millions of dollars in capital investment. It has never been easier to start and scale an online business.”
Tony DeSpirito, Co-manager of BlackRock North American Income Trust, said: “Exposure to high-quality sectors with good trends such as technology and healthcare offer us long-term growth potential, at valuations which in many cases are justified by the potential. Sectors with more deeply discounted valuations like financials and energy offer potential for outperformance, but selectivity is key given the inherent risks.”
Jonathan Simon, Manager of JPMorgan American Investment Trust, said: “On the value side of the portfolio, we like Booking.com. In March this company was in the eye of the storm, however it has responded to the challenges of Covid-19 effectively, adjusting its cost structure to the new reality. We believe the unique proposition of Booking.com, which includes apartment bookings, as well as their subsidiaries Open Table and KAYAK, will be well-placed to emerge on the front foot from the downturn.”
The US has rallied very strongly: is there further to go?
Paul Niven, Manager of F&C Investment Trust, said: “The past decade has seen the US market deliver returns significantly above other developed markets, driven by superior profitability and earnings growth. While current valuations leave little room for disappointment, the pandemic has accelerated many previous trends and consolidated the position of companies with strong financial and market positions. Looking forward, while there are clearly numerous risks, the dominance of the US market will likely continue. Valuations are high but not yet prohibitive and many of the trends which have driven US outperformance remain in place.”
Fran Radano, Manager of The North American Income Trust, said: “The market strength since the lows in March has actually been focused on a narrow subset of names largely in the technology sector. Because of this lack of market breadth, we continue to be able to find value in several industry leaders with strong cash flows trading at fair valuations.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “There are many ways to look at the market valuations at the moment. With regards to price/earnings (p/e) multiples, we believe that against the current sharp recession (which will be followed by a rebound in earnings), there is the risk that p/e multiples based on forward multiples do not capture a normalised level of activity and therefore of earnings. Shiller p/e multiples, which have an element of cyclical adjustment, are likely to be a more valid way to look at valuation levels during this period.
“On that basis, equity valuations are not stretched versus historic levels for European and global equities, while the US equities market is closer to the top of its historic range, but even there, one needs to consider the constitution of the index, given the sizeably increased weight of technology in the US market versus historic averages.”
Robert Siddles, Manager of Jupiter US Smaller Companies, said: “Although the overheated large-cap tech sector could be due for profit taking, the market is just fine at the moment given Fed support. It is a common misconception that stock market valuation affects the market’s direction: the key drivers are monetary policy, investor sentiment (a contrary indicator) and profits growth – as long as we have at least two of the three, the market will be inclined to rise.”
What are your thoughts on tech?
Jonathan Simon, Manager of JPMorgan American Investment Trust, said: “Tech has rallied in the US because it is at the heart of everything we do, and this has only been increased by Covid-19. While we have a significant exposure to technology, it extends beyond the tech sector itself into areas such as consumer discretionary and ecommerce, where we’ve seen a really strong digital shift in a post Covid-19 world.
“In ecommerce, the total online retail sales in the US have expanded from just 1% in 2000 to 11% in 2019, and have outpaced general retail sales by roughly 15% over the past five years. Mastercard spending data shows us that since the outbreak of Covid-19, ecommerce represents around 22% of retail sales with many new customers entering the market. In the US market, the top 10 online retailers account for 60% of ecommerce. Amazon remains the clear leader in this space: it is seven times larger than its nearest competitor and has seen huge growth through its cloud business too.”
Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, said: “We think that arbitrary sector classifications such as ‘technology’ are of limited use, given the pervasiveness of technology today. Instead of classifying a company as a ‘tech’ stock, we categorise companies by the key societal change they are exposed to, for example the rise of online commerce, the evolution of entertainment and the application of machine learning.
“Lockdowns introduced to slow the spread of the virus have disrupted regular patterns of demand. Consumers have turned to online services for their shopping and entertainment needs. Workers have embraced digital collaboration tools, for example video conferencing, to stay connected with colleagues. Patients have increasingly been meeting with their doctors via telemedicine services. On the other hand, demand for real world services, for example travel and entertainment, has been negatively impacted. Most of our holdings have been beneficiaries of these shifts, although some have been on the wrong side of them.”
What are the key risks in US equities?
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “There are areas of the economy facing high degrees of uncertainty, such as the transportation, tourism and hospitality sectors in particular, but there are also question marks about office space usage, and ultimately real estate overhang as a result. There is also a higher likelihood of increased tax levels, both corporate and household, in the mid-term, which could weigh on economic activity. We have therefore already taken the prudent approach of increasing our corporate tax rate assumptions in our financial projections for all companies that we hold in the portfolio.”
Tony DeSpirito, Co-manager of BlackRock North American Income Trust, said: “The lockdown-driven decline in economic activity and spike in unemployment has left the US economy more vulnerable, at a time where US stock valuations are high versus their long-term history. There is less room for bad news should downside risks emerge or investor sentiment wane. We are mitigating these risks by ramping up our stock-level stress testing, and have assumed long lasting adverse scenarios when conducting research on companies.”
Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, said: “We believe, and academic work has shown, that long-term equity returns are dominated by a small handful of exceptional growth companies that deliver outsized returns. Most stocks do not matter for long-term equity returns, and investors will be poorly served by owning them. In our search for exceptional growth companies, we will make mistakes. But the asymmetry inherent in equity markets, where we can make far more in a company if we’re right than lose if we’re wrong, tells us that the costliest of mistakes is excessive risk aversion.”
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