by Dewi John.
The coming year is fraught with risk. The US seems likely to head into recession, with opinion divided over not “if” but “when.” Consensus is settling somewhere between the second half of 2023 and early 2024.
While there’s no direct correlation between GDP and equity values, they do tend to perform worse in recessions. And, while the S&P 500 has fallen from it December 2021 peak, in percentage terms there is likely still further to go when one compares recessionary peak-to-trough. That said, the UK is already in recession and Europe is on the edge, so the immediate prospects for North American equities is relatively more bullish. With a heavy caveat on just how long “immediate” lasts.
Key to how bad (or good) things get is how embedded inflation is, and how good policymakers are at navigating this (spoiler alert: they’ve been a bit off of late).
Jerome Powell, chair of the Federal Reserve, has warned that US inflation may be more embedded than anticipated because of a structural labour shortage, resulting from a combination of early retirement, COVID deaths and falling immigration. In this situation, the most probable thing that will bring inflation down is not a resolution of supply side impediments, but a recession.
The market seems to be taking a more optimistic view, anticipating falling rates over the coming year, with inflation falling quickly without recession.
UK investors would seem to agree with the market. After large risk asset outflows in Q3, November saw high inflows into US equities, at £2.7bn. While US equities are a popular classification, it’s rare to see them this popular. Just how sustained—or well-placed—that confidence will prove to be is likely to be tested over the coming year.
North American equities have certainly been kinder to their owners over the recent past than our home-grown varieties. Over one and three years, the sector has delivered -1.2% and 38.4%, as opposed to the UK All Companies, which has returned -3.7% and 4.3%, respectively. So, while the 12-month difference isn’t huge, North America has raced ahead over the three-year period. However, longer term than that, North America tended to underperform UK All Companies until 2020, albeit with the lead eroded over time.
The last time we looked at the sector, in the summer of 2021, the market was in a very different place, heading steadily up since the COVID meltdown of March 2020, and growth-styled, tech-laden funds had delivered well. The top-10 table was consequently full of tech-laden growth funds. Then 2022 came along and tore up the playbook.
Eight out of the top 10 performers over three years are index trackers, which is a tad unusual. Given the past year, it’s not surprising to see that the top performer is an energy ETF, with oil & gas stocks Exxon Mobil and Chevron together making more than 40% of the fund. Tracker funds can do this in a way that actively managed funds cannot—for good reason, because of the heightened stock-specific risk, that’s an awful lot of eggs to have in just two baskets. There are two materials-themed ETFs in the table that are also new entrants, unsurprising given the strong showing of the materials industry sector over the year.
What is perhaps more surprising is to see an alternative-energy themed fund at number two, RobecoSAM Smart Energy Equities—one of the two actively managed vehicles to make it into the table—although it has struggled over the past 12 months, as has the third-placed Xtrackers MSCI USA Information Tech UCITS ETF.
What the broader leader board does illustrate, however, is passive funds have gone well beyond simply buying a broad index such as the S&P and settling for broad market returns.
Table 1: Top-Performing North America Over Three Years (with a minimum five-year history)
All data as of November 30, 2022; Calculations in GBP
Source: Refinitiv Lipper
This article was updated from the winter issue of Moneyfacts, p15.
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