Opportunities still to be found in the US equity market

Recent data releases have shown that the US economic backdrop is deteriorating, with unemployment hitting 5% and the closely-watched Institute for Supply Management (ISM) Manufacturing Report on Business falling to 47.7.

Readings of below 50 imply negative overall business sentiment.

This news has led the US equity market to record its weakest start to a trading year since 1932, causing some commentators to question the investment case for US stocks. Cormac Weldon, Head of US Equities at Threadneedle, remains convinced that there are exciting opportunities.

“There are undeniable problems in the US economy, and we do think that consensus earnings growth forecasts are still too high,” he says. “But those numbers are for the whole market. There are certainly plenty of companies that can deliver good levels of growth and whose valuations leave scope for useful share price rises.”

Threadneedle’s US team performed very strongly in 2007, with a high conviction underweight in financials adding significant value. Weldon is still cautious on the sector but he is starting to see some opportunities: “We are just starting the reporting season and there are going to be some big write downs from the banks,” he admits. “It is still too early to start buying the sector indiscriminately, but there are some instances where all of the possible bad news and more is reflected in prices, and we have been taking advantage of those. The result is a reduction in our underweight in recent weeks.”

The funds have been positioned for slowing economic growth for some time, with an emphasis on companies able to deliver sustainable earnings growth via niche products or exposure to international demand. Technology holdings such as Apple, Google and Electronic Arts all served portfolios well in 2007. But technology is not the only sector to offer non-cyclical growth opportunities.

“Our healthcare analyst has generated some good ideas and we have added stocks such as Inverness Medical and Schering Plough to the funds in recent months,” explains Weldon.

Despite the short-term difficulties facing the market, Weldon is bullish on the prospects for the whole year. “Interest rates are falling and we are finding lots of companies with strong balance sheets and healthy cash flows that are well positioned to weather the tighter credit conditions we are witnessing,” he says. “Our strong performance over the past five years has been based on doing detailed research at the stock level and backing that research with conviction in portfolios. Idea generation in the team has never been better and that gives us a great chance to outperform again in 2008.”