US economic data points to a broadening US recovery. Fourth quarter GDP growth has been revised up to 3%, US consumer confidence has risen sharply and the labour market is improving.
While the recent rebound in the US equity market is already impressive, Fidelity’s US portfolio managers believe there is potential for further gains.
“The case for US equities is compelling; it remains the location of choice for leading brands and technology firms and it offers exposure to the wider global equity market,” said Fidelity US Portfolio Manager, Aris Vatis.
There are a range of investment themes, says Mr Vatis, that investors can benefit from:
Tapping into emerging market growth – Some investors are concerned with the risk of a ‘hard landing’ in China, yet still believe in its long-term growth story. However, investing in high-quality US stocks can offer exposure to Chinese growth drivers and wider emerging market consumer growth, without exposure to the higher volatility associated with direct investments in the region.
Multinationals like Coca Cola, Proctor & Gamble, Johnson & Johnson and McDonalds now generate large portions of their revenue from emerging markets. Most of these companies are considered stable, safe businesses. Demographically, emerging markets provide a massive source of demand for the goods and services these companies provide.
A technology leader – In technology, the US is a leader. Assembly may be increasingly done in China, but much of the intellectual property rights and the returns on capital typically reside in America. Smartphones and tablets are a good example of this with Apple and Google key players in this market. Demand for these products has been driven by the evolution of the mobile internet.
Supporting this growth, President Obama has revealed ambitious plans to connect virtually all Americans to the “wireless web” in five years. Already, billions of dollars are being invested into the country’s communications infrastructure, which will not only support mobile internet users, but also offer access to cloud computing services; the ability to store content and remotely access it via multiple devices.
There are other companies beyond the obvious that are benefiting from this growth, which investors can consider. For example, Qualcomm is a leader in mobile phone semiconductors and is now expanding into tablet devices – the company benefits from strong free cash flows, driven by royalties generated by handset vendors using their chips and patented technology.
Leading the multimedia revolution – Improving broadband download speeds has led to a revolution in how multimedia content is delivered and consumed. The rise of smartphones and tablets has also helped to support this trend. MP3 players created a profitable market for legally downloaded music, which cannibalised the sales of traditional media, such as CDs. These disruptive technology shifts create excellent investment opportunities. And this is exactly what is happening in the multimedia space right now.
Increasing demand for video content has led to fierce competition between multimedia distributors like Netflix, Apple, Amazon and even Wal-Mart. And America can lay fair claim to being the “content king” thanks to its movie industry. Stocks like the Walt Disney Company and Time Warner are good examples of businesses that are likely to benefit from the royalties earned from distribution rights. Both companies have seen huge increases in demand for the content they produce. Although this is a sector that is still in its early days, it has tremendous growth potential, which should be realised in the years to come.
Energy Independence for the US – There is a strong possibility that the US will become energy self-sufficient in the future. This is based on the commercialisation of shale gas discoveries, rising domestic oil production and renewable natural resources.
Already, thanks to improving technology and new discoveries, the US has almost eliminated the need to import natural gas. As new projects to access previously inaccessible oil reserves approach maturity, US oil production is also set to increase. Additionally, large-scale projects to improve infrastructure are required to support these projects.
This is not a trend limited to the US – demand for oil globally is likely to continue to grow in the coming years. This is good news for companies that specialise in drilling technology. For example, National Oilwell Varco has a 50% share in the global oil drilling equipment market. Strong barriers to entry into the industry should serve to protect the firm’s current market position, ensuring the continuation of high returns on investment capital and strong free cash flow generation.
“US companies are in great shape, they are international in scope and they are operating in a host of attractive industries that are benefitting from favourable multi year thematic drivers,” says Mr Vatis. “Regardless of where an investor lives then, US equities deserve to be a key component of a well-diversified equity portfolio.”
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