Returns from US Equities in 2022 have been mixed. On the one hand, US growth equities have disappointed, while on the other our US value allocation has managed to generate positive returns in sterling terms year-to-date, outperforming the rest of our US equity holdings.
With both the UK and European economies facing up to recession, the state of the US economy looks a little healthier, and investment banks, economists and the papers have divergent opinions as to where the US is heading. In any case, the global economic script has been well and truly amended as rising interest rates and higher inflation have done away with ‘lower for longer’.
Since the financial crisis, central banks have supported financial markets at the first sight of a downturn. However, with inflation at high levels, there has been pressure on central banks to adjust their policy to combat this, which has the affect of indirectly slowing growth. Markets are expecting the US Federal Reserve (the Fed) to peak interest rates at around 4.5% around the beginning of 2023. This implies there will be two more hikes.
In terms of slowing growth, higher rates restrict economic activity. From an employment perspective, corporate margins are reduced, lay-offs increase, and the labour market tends to cool. Another impact of higher rates is a slump in the housing market as mortgage rates rise; the price increase on fixed-rate mortgages over the last year has depressed consumer housing affordability. Though things may currently seem tight, especially in the UK where mortgage terms are typically far shorter than those used in the US, this might just be the healthy correction many economists have called for.
The good news for the US, as opposed to the UK and Europe, is that inflation in the states started to cool during the month of October and should continue to ease through the end of the year. Global growth is slowing, and aside from the services sector, supply chain tensions have also started to ease. Despite ongoing rhetoric to maintain higher rates once they reach their peak, the Fed might not need to increase or keep rates high for very long, which would help to either avoid a recession in the coming year or reduce its depth and impact.
Though headline figures for US indices have made for pretty grim reading over the last 11 months, it is reassuring that the world’s largest economy is relatively robust when compared to global developed peers. The main headwind for US markets over this period has been higher interest rates, and with the pace of these rises set to slow while data remains stable, investors will have food for thought.
We believe macroeconomic data in the US is still resilient. Our exposure to US equities will provide some protection if a global recession occurs, which will see volatility remain within global equity markets. There are also good reasons for investors to keep diversifying their allocations, including within medium and small-sized companies, which typically perform well on the road to recovery. In addition, the US government is providing major incentives to promote domestic manufacturing and products, such as the 2021 Infrastructure Bill and the 2022 Inflation Reduction Act.
As we mentioned in our opening paragraph, our Cullen US Value allocation has outperformed in sterling terms this year, up 5.7% to the end of October. As with most our US equity allocation this exposure has been aided by a strong US dollar and with this in mind, we acted last month to hedge our exposure to the dollar within the Cullen fund. This retains the strategy but removes the impact of currency on returns.
Source: Refinitiv – Market returns 02/12/2022 to 08/12/2022