What is your assessment of valuations of US shares at the moment?
Equity valuations in general are not demanding, interest rates are low, and corporate balance sheets, especially in the US, are in excellent shape. That sets the stage for what should be an improving environment for investors in stocks and in spread credit products. Our valuation work indicates that the S&P500 Index is currently worth about 17 times earnings versus a current market P/E of about 14.5 times on 2008 consensus estimates, suggesting that the upside return to fair value for US equities is in the high-teens.
What is the appropriate strategy to take when investing in US stocks now, with a long-term investment horizon in mind?
We believe the new market leadership will come from the same place it usually does: the old laggards. The new leadership will be what no one wants to own today, especially large and mega-cap stocks which have lagged the market most of the last five years. We believe that the greatest gains over the next five years will be made in those securities people are panicked about today. We believe the US market offers attractive investment opportunities for long-term investors whose strategy is valuation-driven, patient and contrarian in nature.
What is the greatest challenge you are facing in investing in the US?
The greatest challenge for investing in the US is coming from the global commodity markets. Oil has supplanted credit as the driver for the markets. Through oil’s impact on US consumer spending and corporate input costs, the recent run-up in oil prices is causing credit spreads to widen, destruction in demand and changes in consumer behaviour. Since oil went above $120 in early May, credit spreads have reversed their improving trend. If commodities break, or even just stop rising, equity markets should do well.
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