The iconic Dow Jones Industrial Average index of leading US shares this week hit an all-time high, passing the 17,000 point barrier. This record coincided perfectly with the arrival of the annual 4 July American Independence Day celebrations.
After a setback to US economic growth in the first quarter of 2014 due to poor weather, recent data suggests a recovery back on track. There has been positive news from the housing market, improving manufacturing activity, rising automobile sales and decent wage growth.
Historically most UK private investors have been heavily underweight the US stock market. However investors ignore the US market completely at their peril. US listed stocks account for 54.9% of global equity market capitalisation as measured by the MSCI World Index. Indeed nine out of ten of the world’s largest listed companies are US based firms. Four US businesses alone - Apple, Exxon Mobil, Microsoft and Johnson & Johnson – have a collective weighting of 4.9% in the MSCI World index of 1,610 companies, which is more than the whole of France (4.2%).
The US market is also a global leader in certain sectors. For example, the S&P 500 Index of US companies has a 19% weighting to technology companies, which compares to just 1.75% exposure to technology in the UK’s FTSE All Share Index. If you want exposure to leading companies in certain industries, you simply cannot ignore the US.
That said, the current dilemma facing investors is that asset prices across the globe have been inflated by the wall of money printing from central banks in recent years and US equity valuations look among the most expensive. No one can accurately predict short term movements in the markets, and US markets may continue to rise for some time yet but it sensible for investors need to be a little cautious about the short-term outlook and to take a long-term view.
With this in mind, investors considering a US allocation in their portfolio might consider funds which have defensive characteristics, such as a focus on identifying undervalued companies and those generating a decent income. Two funds we rate highly are GAM Star GAMCO US Equity and Aviva Investors US Equity Income II. Click on the name of these funds to view our analysis on them.