Among American equities, large caps currently provide the most potential growth and least risk, says James Awad, managing director of New York-based Zephyr Management L.P., which has US$2 billion in assets under management.
“The United States is a pretty good house in an OK neighbourhood,” he said during an interview in his Park Avenue office in New York.
Meanwhile, Canadians investors are warming to American equities due to the improving performance of U.S. markets. The strong Canadian currency also makes investing in American dollars less risky in terms of currency exposure.
Awad’s analysis indicates the U.S. economy is growing at 2.5%, about half of the traditional post-recession recovery rate.
“Given how bad the recession was, we should be growing at 5% or 6%,” he says.
Other negatives include the possible impact on the American economy of ongoing problems in Europe, slowing growth in emerging markets and a possible market correction.
On the flipside, growth levels exceed the expectations of a year ago, and many corporate balance sheets are strong, with large amounts of cash.
Moreover, some of the forces that drove jobs out of the U. S. have reversed. The American dollar has depreciated, while wages have fallen in the U.S. and risen in emerging markets.
Awad also points to the history of innovation within American large caps. “It doesn’t happen in China,” he argues. “You don’t get Google. You don’t get Facebook. You don’t get Apple. You don’t get Instagram in China,” he says.
Meanwhile, a part of the picture will remain unclear until later this year and early next year. A Republican win in the November 2012 election could set the stage for a bull market looking forward in the medium term.
“It wouldn’t be in 2014 because they would restructure the cost side of government like (President) Reagan did,” he says. “You have to take the pain before you reignite the growth.”
Conversely, a re-election victory by Democratic President Obama, accompanied by regained control of the legislative process by the Democratic Party, would bring bad news for corporations but greater benefit for the country’s lower and middle classes. A Democratic victory would also mean more government and perhaps less equity yield in his estimation.
“You would probably get tax and regulation increases and you would [see] the bull market ending in 2012,” Awad predicts.
These factors point to selecting attractively-valued large-cap stocks and funds containing them, especially companies paying stable dividends and getting the majority of earnings from within the country and a major portion from emerging markets.
“Buy the biggest companies in the S&P,” he says. Awad figures that at least four large-cap categories fit the bill for nervous Canadian investors looking south.
“Technology drives the world,” he says, adding that companies and consumers use technology to reduce costs.
Infrastructure companies dealing in emerging markets and energy companies with strong revenues in the U.S. also offer safe havens, as do consumer staples companies.
Indebted companies and small-cap stocks are best left for another day, he says.
“If there is a problem in Europe and the world becomes conservative, [the market] will slam small caps.” This turn of events would lead to a risk-off situation, which typically works against small caps.