By Felix Wintle, Manager of the Neptune US Opportunities Fund
H1 2014
- Economic data: after last year’s strength, economic data has disappointed. Indeed, the economy contracted 2.9 per cent in the first three months of the year — the US economy’s worst performance for five years. However, rather than a symptom of underlying economic weakness or a secular slowdown, much of this slowdown has been weather related: the US experienced its coldest winter since February 1979 and this had a significant impact on productivity.
- Market strength: despite the weaker economic data, the S&P 500 Index has continued to climb to record highs. The overall strength of the market, however, has masked significant sector rotation. The winners of 2013 have been sold while defensive, late-cycle plays are outperforming. We have also seen a wide divergence within sectors and the performance of style factors has shifted markedly. Together, this suggests that the US is transitioning to a mid-cycle market.
- M&A activity: the first half of 2014 has seen a pick-up in mergers and acquisitions (M&A), with a number of large deals in the healthcare, technology and telecommunications sectors. Interestingly, the market is rewarding M&A deals, with the acquirers’ share prices jumping on announcements, as investors like companies that are using cheap debt to acquire attractively priced equity and where there are meaningful synergies to be realised.
H2 2014
- Economic expectations: while overall the US economy looks strong, consensus expectations are quite high and we believe there is a possibility that GDP growth could disappoint. After the weather-related slowdown in the first quarter, the economy will need to accelerate in order for consensus estimates to be met and there may be some volatility in the summer as this news is digested.
- Market cycles: the market remains strong but as the cycle transitions, there is a need to look at internals to get a clearer picture. We remain fully invested but have reduced the portfolio’s beta and have rotated into sectors that have attractive valuations and more stable growth outlooks. We are now neutral in most sectors, with an overweight in large-caps.
- Monetary policy: the Federal Reserve has continued with its tapering programme and although Janet Yellen slightly spooked the market with language surrounding interest rates, we would still not expect the path of monetary policy to significantly change in 2014. It is our belief that corporate America remains in rude health, with strong corporate fundamentals and earnings growth. We are currently in a very strong M&A cycle and believe that this will continue over the medium term. We therefore remain positive on the market.
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