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According to Richard Brody, head of equity management at Illinois-based PPM America and Gibson Smith, co-chief investment officer at Colorado-based Janus, the consensus view of the US economy, largely derived from recent turbulence surrounding the status of sub-prime lending, is wrong, and investors can expect both their investment styles to bear fruit.
The main differences are in their sector picks. The US market is sufficiently varied and deep to allow for the supposed contradiction of value and growth stories to work.
ôValuations against earnings yields are at their lowest for 10 years,ö says value-champ Brody. ôRelative to bond yields they are at their lowest for 15 years and the US is also cheap relative to other markets. Stocks are trading at a multiple of 15 times one year earnings estimates while value stocks are at 12.5x.
ôWe believe value has a long-term advantage over growth, and it has been stronger for the past seven years, but in the short to medium term it is going to be about stock picking and fundamental research.ö
That is a principle that Janus too holds in high regard and is one of the foundations of SmithÆs confidence in the US growth story. ôCompanies that we have met believe that the economy is stronger than consensus,ö he says. ôThe S&P 500 is at 15x earnings and the growth of between 5.6% and 8% that people are expecting seems low.
ôWe are looking at high single digits and the sectors that will perform well are those correlated with the economy and a stronger rate of growth.ö
Brody at PPM America is loathe to make macro predictions, but argues that the banking sector, in particular, has become undervalued because of a lack of confidence in the economy. This, along with consumer discretionary stocks, is one of the companyÆs major over-weights.
ôWe need to look at the reasons why the market is putting a discount on stocks,ö he says. ôAnd then decide whether these reasons are valid. From a macroeconomic perspective the yield curve has been flat and this has meant some banks are discounted by as much as 305. We expect that it will normalise and this will mean short-term investors push the value of banks up. Sub-prime is a very small part of the biggest banks in the US.ö
The yield curve issue is also of concern to Smith who, as well as his CIO duties manages JanusÆ balanced funds. ôWe see stronger volumes, pricing power and a stronger economy than the consensus,ö he explains. ôThere has been an inverted yield curve but we see the spread between two and 30-year notes starting to normalise and this will be supportive of risk assets.ö
For Janus, this has translated into support for gaming sector, publishing and consumer product stocks.
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