Team USA – time to invest in domestic US companies?

Hugh Grieves

Premier Miton US Opportunities & US Smaller Companies Funds

“There is a Providence that protects idiots, drunkards, children and the United States of America” said Otto von Bismarck (Chancellor of Germany 1871-1890). In an uncertain post-pandemic world, buffeted by war, price instability and rising interest rates, America still today appears advantageously well placed for investors.

After more than twenty years of globalisation and deflation (a general reduction in prices in an economy), the world order has pivoted sharply, and old certainties have been discarded. Until recently, investors have been able to comfortably profit from purchasing less economically sensitive ‘growth’ companies and long-dated bonds (i.e. those with long term maturities), and then watching valuations inexorably increase with ever lower interest rates. The future however, may be the opposite; deglobalisation in the face of mounting international tensions and the pandemic’s exposure of fragile, trans-oceanic supply chains. The off-setting extra costs of production, energy and raw materials incurred are inflationary which consequently is causing central banks to raise interest rates as they attempt to alleviate price pressures.

Some economies however, like the USA, appear inherently better placed to withstand these tectonic shifts than others. Firstly, America is a net exporter of energy and so enjoys the security of supply as well as lower prices than Europe. The price for natural gas in America is approximately one quarter of that in the UK (Source: Bloomberg). Secondly, rising mortgage rates have a more limited impact in the US given that American mortgages are generally fixed for thirty years, rather than the two or five years that you typically find in the UK, giving most US households little to fear from today’s rising interest rates. Thirdly, America enjoys a more flexible labour market, with limited collective wage bargaining, compared to Europe. This makes a destructive spiral of rising prices, resulting in rising wages, much less likely in America and therefore inflation less difficult to control. Finally, according to Moody’s Analytics, US consumers built up an enormous cash cushion during the pandemic, aided by generous government stimulus cheques, totalling $2.6 trillion (12% of US GDP) which will help support consumer spending in the coming years.

Not all US listed companies will benefit though. The commonly followed, large company S&P 500 Index is dominated by technology behemoths like Apple, Amazon, Facebook and Google, which were big pandemic “winners”. Now they face not just slowing growth as the pandemic tailwinds fade away, but also, they all have significant exposure to weakening overseas markets. This is compounded by having to sell in local currencies that are falling in value, so lower profits are worth even less when repatriated home.

Instead, investors can consider small and mid-sized businesses that are more concentrated inside America; companies that can benefit from America’s fortunate position. These businesses may be dull and boring businesses and will never claim to change the world, but in a rapidly changing world, safe and predictable can be attractive. An example in our fund would include Graphic Packaging, a leading manufacturer of printed cardboard of the type used for cereal boxes and food can packs. After years of limited growth and industry consolidation, volumes are growing once again as consumers favour goods with recycled cardboard packaging over plastic. But now the company can also raise prices too as higher energy costs in Europe enable the company to produce at less than 20% of the cost of European competitors (source: Graphic Packaging Q2 2022 Earnings Call). Another example in our fund would be Vulcan Materials, a large aggregates producer. Boosted by the infrastructure investment bill agreed early in the Biden presidency, and healthy commercial demand supported by companies ‘re-shoring’ production and having to invest in new factories and warehouses, demand for stone remains high whilst supply is limited by environmental restrictions on new quarries.

Since the pandemic, the investing landscape has changed profoundly, and earlier successful investment strategies have unravelled. At least within America, there is one economy which is well placed to weather the turbulent winds sweeping the globe better than others, providing a relatively stable opportunity for growing investors’ capital.

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Risks

Reference to any particular stock does not constitute a recommendation to buy or sell the stock. The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Funds that have a strong focus on a particular country or region can carry a higher risk than funds with a more diversified portfolio.

This fund may experience high volatility due to the composition of the portfolio or the portfolio management techniques used.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

The Graphic Packaging and Vulcan Materials stocks are currently held by the Premier Miton US Opportunities Fund, as at 31.08.2022.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the fund’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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