(pictured: Jeff Middleswart)
Australian investors mainly want to hear about US growth prospects when they talk to US-based global managers at the moment, according to Ranger International’s Jeff Middleswart, who was on one of his frequent visits to Australia last week.
And while those prospects are still good, they do not look quite as bright as they did a few months ago. In fact, Middleswart asks: “Could 2016 be the year when foreign – non US – markets get their mojo back?”
He is the co-manager of the Ranger International Global Income and Growth Fund, which is available to Australian and New Zealand retail investors through Equity Trustees and marketed to institutional investors by AFM Investment Partners.
Last year, for the third year running, non-US stocks underperformed the S&P 500 and Australian stocks performed worst than most. In US-dollar terms, the S&P 500 delivered a cumulative three-year return of 52.5 per cent to December 2015. This compares with 37.5 per cent for Japan, 19.1 per cent for Europe, 8.0 per cent for the UK and minus 4.4 per cent for Australia (ASX 200).
“Will the non-US portion of a geographically diversified portfolio ever pull its own weight?” Middleswart says. “The easy answer is ‘yes’. The difficult question is ‘when?’.
For US stocks to continue to outperform some combination of the following must occur:
- The US dollar continues to gain ground against foreign currencies
- US stocks benefit from a change in relative valuation, and/or
- US stocks deliver faster earnings growth than their foreign counterparts.
While US stocks are cheaper than some major foreign markets on a trailing P:E basis – but not cheaper than Australia – the US is among the most expensive based on expected measures – but not Australia.
“While each foreign market faces its own headwinds and the US economy seems to be in better health than its competitors,” Middleswart says, “it is not inevitable that US stocks will outperform again this year. Many foreign markets seem to have the advantage when it comes to valuation and some may even have a leg up on the earnings front. The US dollar has outperformed some major market currencies for three consecutive years and while that could happen again these relationships have a history of changing course after a few years at most.”
Ranger International believes that energy infrastructure stocks, such as pipelines, are starting to look attractive, notwithstanding the continued sell-off in oil and gas prices.
“I think we’ll see some real bargains coming up,” Middleswart says, “but we haven’t started buying just yet.”