Probably the most impressive development in the investment universe in the last couple of years has been the dramatic growth in US corporate profits. The question is whether these record profits are sustainable because of the continuing crisis in the eurozone, according to Paul Chew, Head of Investments at US equity specialists Brown Advisory.
The impact of the austerity measures on the EU economies could be severe. Nearly 50% of eurozone GDP comes from government spending, which is almost double that of the US. As country after country in the eurozone cuts spending further, the odds of EU GDP turning negative increase.
A European recession would clearly hurt US exports to Europe, but the US economy is not overly exposed as the EU only represents approximately 20% of the total US export market. Demand growth in the emerging markets should help to counteract any downturn in Europe. Moreover, Chew believes that the strength of corporate balance sheets in the US should help to alleviate the potential impact of any tightening of global credit caused by a more restrictive lending environment in Europe.
On US corporate profits, he points out that historically S&P 500 earnings have grown twice as fast as GDP. In 2011 S&P 500 earnings have risen a remarkable 15% while GDP expanded just 1.4% annualised. US corporations have generally delivered exceptional numbers by squeezing every last dollar they can out of sluggish sales through tight cost controls. Of course the focus on profits has kept a lid on new hiring, leaving the unemployment rate at around 9%. The pre-tax margin for S&P 500 companies has gone from 4.4% during the recession of 2008 to 12%.
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Chew says the frustration in 2011 was the dichotomy between the macro and micro data. Whilst many companies reported stable demand and business fundamentals, these attributes mattered little when the market was fixated on the European debt crisis and fragile global recovery. Volatility and thematic investing were the trends last year.
Chew believes, however, that equity valuations are relatively compelling, even if corporate-profit growth moderates, as he expects. The S&P 500 is currently trading well below its 5, 10 and 20-year price/earnings averages.
For investors seeking exposure to US equities, there are a huge number of ETFs to choose from, tracking a range of different equity indices. The following list is just a selection of the many US equity ETFs available to UK and European investors.
Large Cap:
iShares S&P 500 ETF
DB X-trackers S&P 500 Equal Weight ETF
Ossiam ETF US Minimum Variance ETF
Credit Suisse Dow Jones Industrial Average ETF
Credit Suisse MSCI USA Large Cap ETF
ETFX Russell 1000 US Large Cap ETF
Amundi Nasdaq 100 ETF
DB X-trackers S&P 500 2X Leveraged Daily ETF
RBS US Large Cap Trendpilot ETN (N.B. NYSE listed)
Small Cap:
Credit Suisse MSCI USA Small Cap ETF
iShares S&P SmallCap 600 ETF
ETFX Russell 2000 US Small Cap ETF
Broad Market:
SPDR S&P US Dividend Aristocrats ETF
Lyxor MSCI USA ETF
PowerShares FTSE RAFI US 1000 ETF
PowerShares Dynamic US Market ETF
RBS US Mid Cap Trendpilot ETN (N.B. NYSE listed)