US Equity: Where next for growth stocks
Strong corporate earnings growth, along with positive economic data, supported US equity market performance in 2011 — and thus far in 2012. We believe investors are taking comfort in the progress being made on the US economic front as important indicators, including employment, manufacturing and retail sales, point to improving economic conditions.
The sustainability of this rally, however, will be impacted by how events play out in Europe in light of sovereign debt issues and how the US handles its current budget impasse. Overall, we are positive about US equities and the US economy in 2012. There are various factors that play into our optimism:
- We believe the US housing market is near a bottom. There has been modest housing price appreciation in select markets, and stabilisation in a number of others. Stabilisation in housing prices in the US could potentially lead to improvements in excess housing inventory and, ultimately, modest price improvements.
- Relative to other developed markets, the US equity market is well positioned for growth at this time. Not only is it positioned to grow faster than other developed markets, such as Japan, the UK and Europe, but ultimately valuations are cheap. This could deliver better equity returns over the long term on the back of a stronger economy, stronger US corporate balance sheets and an entrepreneurial spirit that ultimately translates into innovation.
- We believe low interest rates on mortgages and lower energy prices have put more money in consumers’ pockets, which has helped create stable demand growth in several sectors due to increased spending. In general, we believe US consumers are in better financial shape than before the recession, which is helping to drive performance in the US equity market.
- The US corporate story continues to be compelling. Many US companies emerged from the crisis in 2008 leaner and with stronger, cleaner, balance sheets. We are seeing this reflected in improved margins amid modest growth. Overall, cash on the balance sheets for US corporations is at an all-time high. We believe this may start to translate into increased Merger and Acquisition (M&A) activity. We saw a modest pick-up in M&A activity in 2011 until the summer, when things slowed down. We think 2012 will see increased levels of M&A activity.
In light of US economic improvements and as global macroeconomic issues play out, we are seeing many opportunities in high-quality, high-growth companies that have sustainable growth characteristics. We are presently finding interesting growth in the US energy sector, where a mini energy boom is taking place in the exploration of oil and natural gas. New technologies are being deployed to discover significant untapped reserves, and companies in the energy equipment and services industry are especially benefiting. We foresee strong growth in this industry in 2012 and longer term.
We are also finding opportunities in the technology sector, where many companies are reporting robust growth and trading at what we think are attractive valuations. If the US economy continues to improve, we anticipate more capital expenditure in the latest technology solutions that can help businesses increase productivity and lower costs, which could potentially benefit a variety of companies in the sector.
We expect growing consumer demand in developing markets to continue to be a driver of growth for US companies with leading global brands. In our discussions with company management, we are finding they are not particularly concerned about recession fears in Europe or a slowdown in Asia, as these areas continue to show demand resilience.
We remain focused on our strategy of investing in innovative, fast-growing companies that are leaders or emerging leaders in their industry, particularly those demonstrating increasing profitability or growth potential relative to the overall economy.
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