In the U.S. Equity Market, Expect the Unexpected

At the start of this year, market analysts in North America were strongly convinced that U.S. equities would underperform in 2015. This view was based in part on predictions that after five years of U.S. stock market outperformance — by some 18 percentage points over the rest of the world last year — markets would finally show mean reversion. Also, observers anticipated thatquantitative easing by the European Central Bank将有助于恢复欧元区的经济。

Our global equity team at Investec Asset Management was not quite so sure. U.S. equities might, on average, look expensive. But there are plenty of high-quality companies offering reasonable value and good earnings momentum that were delivering good shareholder returns. The team’s portfolios were slightly underweight the U.S.; however, exposure was raised close to neutral during the first half.

Although the U.S. did underperform in the first half, returns were still positive, whereas most of the apparent returns from euro zone equities were wiped out by currency weakness. The best returns came from Japan, where the market looked stale from the top down but a growing number of companies offered an attractive combination of good value, improving earnings growth and an increasing focus on shareholder returns.

In our view, this shows that in a year when so much attention has been paid to macro issues such as中国，希腊和Federal Reserve policy, the most abundant source of returns has come from picking the right equity themes and the right stocks. Over the past six years, many investors have sold active equity funds and bought passive exposure. On average this year, those who have invested in active funds have been rewarded, and we believe they most likely will continue to be.

传统智慧也在其前往资产配置方面。股权回报是谦虚的，但它们是积极的，波动率较低。发达的市场政府债券 - 历史防守，低风险资产类 - 已经提供了挥发性的负面回报。股市的牛市现在已经超过六岁，商业周期不得多。这已经是历史上最长的业务扩张时期之一，而股权市场自2011年以来尚未发生重大挫折。当然，投资者想知道这可以继续持续多久。

The answer — we think — is quite a while. Economic growth has been more moderate than in previous cycles, and there is no sign of the overheating that usually occurs late in the cycle when credit growth is booming, inflation picking up and growth accelerating. Equity markets have not been driven above the long-term historical average, despite unusually low interest rates and bond yields and no excess of optimism. There doesn’t seem to be a rush of money into the market either. The gloom of six years ago has dissipated, though the euphoria normally seen at market tops is notably absent. Moreover, Bank of America Merrill Lynch research released this month suggests that bull markets do not die of old age.

We believe that the second half of 2015 and at least the first half of 2016 will offer more of the same: steady economic growth, continuing low inflation and a pickup in the growth rate of corporate earnings. This will improve the valuation of equities, and in response markets will probably rise steadily, in our view. Bond yields could drift higher, but the first half’s performance looks more like a retreat from overvaluation than the start of a sustained bear market. There will be plenty of macroeconomic worries, mind you. But, although geopolitical issues will dominate the media, it could be far more rewarding for investors to spend their time and energy seeking out opportunities to add value through thematic, stock and credit selection.

Max King is a portfolio manager and strategist forInvestec Asset Management’s multiasset team in London.

See Investec’s disclaimer.

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