Global Markets: US prospects - The party's not over yet

Fund managers are still bullish, says Abigail Montrose
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The US stock market has been a runaway success so far this year with share prices up around 20 per cent. The biggest gains have been chalked up by the largest companies with some companies seeing their share price soar by 50 per cent or more.

Investors who have not yet moved into the US market may fear they have missed their opportunity. But many fund managers remain bullish about the US, arguing that its recent strong performance is underpinned by the improved competitiveness of companies, strong earnings figures and favourable economic fundamentals.

Investors have poured money into the market leaders, staying away from small companies. Coca-Cola is trading at 44 times earnings and Microsoft at 55 times. This may make the shares look overbought, but Katherine Garrett- Cox, head of American equities at Hill Samuel Asset Management, points out that in many cases the mark-up is justified by earnings growth.

The top five companies in the S&P 500 index - General Electric, Coca- Cola, Exxon, Microsoft and Intel - saw earnings grow on average 41.3 per cent over the year to March. In contrast the bottom 495 saw earnings grow by an average 12.3 per cent. This has prompted Hill Samuel to recommend its US large companies fund, rather than its small cap fund, to investors.

Perpetual similarly continues to favour large US companies. While the market may experience a small correction in the near future, the investment house expects large company share prices to continue their upward trend.

But not all investment houses see big company funds as offering the best opportunities. Michael Grant, head of Schroder's US desk in London, agrees that many large companies have produced impressive earnings growth, but argues that this has been the result of consolidation and mergers producing one-off benefits.

"If you take a time frame of two to three years, it is wrong to assume that this level of earnings growth can be sustained. We expect large caps to continue to do well this year, but in 1998 onwards, most of the wind behind big companies will have been spent. The elastic band has been stretched as long as it can," he says.

While large US company share prices have soared, smaller companies have been in a bear market for the past year - but this does not mean they now offer better value than large caps, according to Bob Yerbury, head of the US desk at Perpetual.

A number of other fund managers disagree, believing that investors should move into small to medium caps while share prices are relatively low.

"Very large companies in the US do not have the strong earnings profiles that can be found in the small and medium company sector. If you take a two to three-year view, you are better looking at small to medium-sized companies which can sustain their earnings growth," says Mr Grant at Schroder's.

With the US stock market at an all-time high, the search for value stocks becomes more important than ever. Perpetual continues to look for growth companies and currently sees more growth and profit certainty in large companies.

Hill Samuel is looking for stocks with a specific catalyst such as a restructuring plan which it thinks will help move the price. One such move was into International Paper, where the shares have already risen on expectations of a rise in paper prices, and Hill Samuel expects a company reorganisation.

Schroder is moving into stocks which it thinks will be able to sustain their earnings growth over the long term. It is moving funds out of the technology sector in the short term and has moved out of consumer cyclical stocks which it thinks have peaked.

While fund managers disagree over which areas of the US market will provide the best value in the future, all expect to continue finding value there. As Ms Garrett-Cox points out: "If you are investing for the long-term of one to five years, we believe the US equity market continues to look attractive. We can still find companies which look attractively valued."

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