Nick Roe-Ely, manager of JOHCM American Growth fund tells MoneyWeek where he'd put his money now.
For much of 2005, the consensus view was that US stock prices would make no progress due to rising interest rates, commodity prices, energy prices and inflation on the one hand, and a weaker dollar, lower productivity, slowing corporate profits, and the twin deficits on the other. Additional negatives brought about by the hurricanes, deteriorating confidence in the Bush administration, the bankruptcies of Delphi, Refco and a couple of airlines, as well as the pending retirement of Alan Greenspan, have all underpinned the bears' cause. However, the bears turned out to be a little wide of the mark with regard to inflation, productivity and corporate profits, and US equities regained their footing during November rallying to four-year highs in the process. I anticipate that US equities will continue to make progress into 2006, not only because November-January historically tends to be the strongest period of market performance, but because the backdrop remains favourable.
Despite the domestic and external shocks of recent years, the resilience and flexibility of the US economy continues to show through, growing by more than a 3% annual rate in each of the past ten quarters, the longest period of such positive momentum for 20 years. Growth has been reasonably broad-based of late, reflecting solid spending by consumers, businesses and the government, coupled with an accompanying pick-up in productivity and relatively benign inflation data. The US corporate sector, and the medium-sized segment in particular, is in the rudest health for close to a generation something that means strong foundations have been laid for sustainable growth for a couple more years.
Still, while US equities could once again confound the sceptics in 2006, a shift in market leadership cannot be ruled out and the dispersion of returns may be quite wide. Performance could well come from stocks of different styles and sizes than was the case previously. Value and small capitalisation stocks are not the steal they were, and, following the multi-year rerating they've enjoyed, large corporations aren't necessarily the best things to buy either, given that earnings estimates for these seem too optimistic.
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Instead, some of the more interesting opportunities are to be found in niche medium-sized corporations in consumer products and services, energy and information technology. Overall, consumer spending remains fine, with the US consumer healthier today (when measured in net worth) than ever. Furthermore, a still-firm housing market and steadily improving labour market will ensure they do not shut their wallets. Niche corporations well placed in this regard are internet and catalogue retailer Coldwater Creek Inc (CWTR, $34.04), textiles and apparel firm Mohawk Industries Inc (MHK, $87.00), household products group Tupperware Brands Corporation (TUP, $23.34) and food and staples retailer Whole Foods Market Inc (WFMI, $152.00).
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And while energy prices have eased in recent weeks, the US still has to get to grips with its long-term energy problem. Firms such as oil and gas group Ultra Petroleum Corporation (UPL, $58.60) and equipment and services firm Cal Dive International Inc (CDIS, $39.41) will both be part of the acceleration in US exploration and production activity. Finally, with businesses flush with record levels of cash, they need further to boost investment spending both to protect and drive profit growth. Corporations such as software firm Hyperion Solutions Corporation (HYSL, $52.81), telecoms equipment group Harris Corporation (HRS, $43.13) and computers firm Network Appliance Inc (NTAP, $29.50) could all go far, given their exposure to strong demand for services and software.
