Where next for the US?

The US market has pushed ahead of other global stockmarkets. As the world economy cools, can it sustain its growth path, ask the BlackRock North American Income Trust investment team.

As US managers, we understand many of the arguments about the American market. “It’s all about FANGs” (Facebook, Amazon, Netflix, Google), for example, is something that we hear a lot.

Certainly, the FANG stocks have performed well and led the market higher. However, the US market is the most diverse in the world and has more to offer investors than large technology companies.

The FANGs don’t pay dividends so they are not part of our universe. However, we retain an overweight position in tech, finding plenty of companies that fit our high-quality and dividend-growth criteria. A rising number of companies in the sector have added dividend payments to shareholders as a viable use of their high cash balances, rejecting the notion that IT firms can add value to their investors only via share price growth.

It’s important not to assume that tech is the only show in town for growth. There are plenty of areas locked into long-term structural change that do not command some of the giddy valuations of parts of the tech sector. For example, our portfolio holds an overweight position in healthcare, where the ageing population continues to drive demand.

We particularly like innovative companies focused on improving efficiencies because rising costs are a challenge for the healthcare sector. Innovation and strong cost control can work hand in hand to improve efficiency, and companies that can help have a natural tailwind. We are also looking at investing in pharmaceutical companies that have increased their research and development capabilities.

“It’s expensive” is another familiar cry about the US market. Yes, the valuations of certain high-growth companies are high, which skews the overall picture for the US market. The market has also been prone to some exuberance in the value that it assigns to new companies coming to market. These companies are undoubtedly disruptive, but may never make profits.

However, this is not the majority of the market and not where we choose to focus our attention. We still find plenty of high-quality businesses that are making good returns for shareholders and paying attractive, growing dividends.

There is also the perception that it is difficult to beat the index. The US is an efficient market, but it doesn’t mean that active investment managers can’t provide a differentiated return. For many investors, a growing income is a far greater priority than capital growth.

To our mind, in the US market, investors need a manager who is genuinely active and providing something different to the index. In this way, the BlackRock North American Income Trust, for example, can sit comfortably alongside index exposure.

Finally, more recently, investors have started to worry about the US market’s long period of outperformance. Can it last? Is the economic and market cycle turning?

We believe that there is more room for this cycle to run: household finances appear to be in good shape, while inflation is moderate and government spending is increasing. Certainly, the ongoing trade tensions are a source of concern, but we believe that we can navigate these problems in the portfolio.

It is worth adding that if the cycle does turn, a passive option may not be protective and will simply track the index lower. Having an active manager who can make strategic shifts could prove important in this environment.

Our approach at the trust is to look for high-quality businesses – both in terms of their management, but also their franchises and their balance sheet strength. We want to find those businesses that have shown a disciplined approach to paying dividends, but that, in our view, offer significant prospects of dividend growth in years to come.

Tony DeSpirito is head of BlackRock's US income & value team

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