Paul Quinsee, Chief Investment Officer, US Equities, JP Morgan Asset Management, gives his views on the US equity market.
Paul Quinsee, chief investment officer, US Equities, JP Morgan Asset Management, gives his views on the US equity market. After a strong year in 2013, what does the future hold? As always, the views expressed here are not necessarily shared by this publication but it is pleased to share these insights with readers. (A brief description of a fund operating in his team, with figures, is given below.)
After 2013 was the best year for US equity investors since 1995, what’s next? If we look briefly at lessons learned last year, we saw for US value investors that the classic contrarian measures of stock selection (low price/earnings, low price/book value and low price/free cash flow) all paid off very well during the year, as confidence grew in the prospects for continued economic recovery. But for growth investors, excitement around innovation in biotechnology and mobile technology also provided some powerful investment themes, and the Russell 1000 Growth benchmark actually slightly outpaced the Value version in what most would consider a banner year for the value style.
If we turn to the outlook, what can we expect in 2014? We foresee a modest acceleration in profits growth. From a longer term point of view, we think that profits are roughly in line with trend.
That comment is actually a strong statement to make, with net profit margins for the S&P 500 companies hovering around 9 per cent, well above historical average. But we think many of the drivers of these high margins are long lasting. For example, multinational US corporations are major beneficiaries of globalisation and technological change. We think that will persist over the next 5-10 years.
Lower interest rates and lower taxes have also helped boost profitability. Some of those benefits may gradually fade over the course of the year. However, we think that higher interest rates may actually improve profits initially, with low returns on cash and low interest margins in the banking sector depressing returns during the era of so-called zero interest rate policy. Meanwhile we would also expect some help for company revenues from acceleration in the pace of economic recovery in the US this year.