While emerging market investors were drawing upon nearly all the layers of thick skin they have developed over years of endured volatility, US equity investors had an easy ride last year.
Indeed, US equities posted gains of around 30% in 2013 amid the release of generally positive US economic data and with the support of continued accommodative monetary policy.
Corporate profit growth still exceeds sales growth thanks to margin expansion, while incremental earnings per share growth was driven by strong share repurchases. Also, overall equity valuations (including forward price-to-earnings multiples) expanded in the period and accounted for most of the market's return as investors moved into equities.
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After its meeting in mid-December 2013, the Federal Open Market Committee (FOMC) said it will reduce its bond-buying programme from $85 billion (£51bn) to $75bn per month. This reflected the improved labour market and US government's fiscal situation. However, the central bank de-emphasized its previous unemployment rate threshold for tapering quantitative easing by maintaining low rates past 6.5%.
It appears FOMC members believe that the economy can withstand a gradual reduction in policy support and can maintain its trend of steady improvement.
With the major US equity market indices up more than 50% since the end of 2011, we feel it is becoming more difficult to get excited about prospects for further sizable market gains, partly due to our belief the market's performance has outpaced the underlying earnings growth of corporate constituents, with the main driver of recent performance being expansion in valuation.
Amid a backdrop of a relatively tepid economy, corporate sales growth has been modestly positive in the past couple of years, while continued margin expansion and share buyback activity have collectively driven earnings-per-share growth only into the mid-single digit range versus a gain of more than 30% for the broader-market S&P 500 Index for 2013.
We believe GDP growth is likely to fall to the 2-3% range. We do not share the view that Fed policy is a boon to equity investors. We think it is symptomatic of a worrisome lack of economic growth after five years of unprecedented monetary stimulus. Amid this uncertainty, we will seek to use bouts of profit-taking to add to holdings in our favourite companies.
Looking to 2014, it appears the "easy" returns of 2013 are unlikely to be repeated. We would suggest investors focus on quality as a differentiating factor, as the past year has been marked by more thematic shifts. While we are acutely focused on analysing companies from a bottom-up perspective, recent visits across our investment team have found certain sectors could hold more value over time - but not without risk. Areas within large-cap technology, energy and certain areas in industrials have underperformed and some, not all, companies retain strong business models and have been suffering from what we would deem as temporal headwinds.
As ever, we remain conservative. We think there are opportunities to add to some of our existing companies but we are always measured in our actions.
Paul Atkinson is manager of the North American Income Investment Trust