Will US equities continue to rise?

The US equity market has performed strongly this year, with the S&P 500 returning 27.5% year-to-date, versus the MSCI AC World Index’ 23.14% performance, according to data from FE Fundinfo.

The US index has also consistently been in positive territory for the past 10 years, with the exception of 2018 – but still beating the world markets.

Discreet annual calendar performance (%)

Source: FE Fundinfo

But concerns over a global slowdown and the US-China trade negotiations have made investors question whether US equities can continue the momentum into next year.

Grant Bowers, senior vice president and portfolio manager for US equities at Franklin Templeton, acknowledged investor concerns and expects slower growth in both global and US markets.

“We certainly are in one of the longest bull markets in the US. But at the same time, it has been a very shallow level of economic growth, and the net result is this slow rate of growth that we’ve seen over the last 10 years,” Bowers said at a recent media briefing in Hong Kong.

He also expects more volatility in the US next year, given the ongoing US-China trade negotiations and the upcoming presidential elections.

No massive drawdown

However, despite the expectation of a global slowdown, Bowers continues to be positive on US equities.

“I think the prospect of a massive drawdown in US equities is pretty remote,” he said, citing positive macro-economic and company fundamentals.

“Consumer spending remains strong in the US. We are also seeing strong wage growth, low inflation and positive corporate earnings.”

However, he warns that investors should not expect the same returns that the asset class delivered this year.

“Next year will be a good year, but I will be surprised if it is as strong as 2019, given how strong it really was. I am close to 30% in my portfolio this year (see fund performance below), and I will be shocked if we were up another 30%.”

He believes that returns for US equities should be at the historical average of 5-10%, given the GDP outlook of 2% and earnings growth rates at “mid-single digits”.

US equities are also an attractive asset class for Ricky Chau, Hong Kong-based portfolio manager for multi-asset solutions, who also spoke during the briefing.

Although Chau prefers fixed income over equities from a multi-asset perspective, he singled out the US equity market.

“Within the multi-asset universe, we are actually looking lesser in terms of equities, given that global growth is slowing down as well as the rising volatility.

“But the US economy is quite solid relative to other economies, and we do see US equities as an attractive investment,” he said.

Grizelda Lee, Indosuez Wealth Management’s Hong Kong-based head of discretionary portfolio management for Asia, is also positive on the asset class.

“I tell my clients that in the long-run, I like US equities, because in the past 20-30 years, they have made a lot of money.

“So it is always good to remain in US equities, though the timing has to vary next year as it may get volatile given the upcoming elections,” she said recently.

Within US equities, Franklin Templeton’s Bowers likes secular themes that he expects to continue to grow despite the global slowdown. These include companies in the technology, healthcare and consumer space.

“We see that the world is changing for many industries and the companies that are adopting technology and investing for the future are the ones that are going to survive and grow,” he said.

Information technology, healthcare and consumer-related stocks account for the three largest sectors in the firm’s US Opportunities Fund, which Bowers co-manages with Sara Araghi, according to the fund factsheet. Bowers has been managing the product since 2007.

The Franklin US Opportunities Fund vs benchmark and sector YTD

Three-year performance