Seung Minn: The US equity market rallied sharply in the second quarter as the investor confidence returned, and the earnings were not as bad as the market expected. As we look forward to the remainder of the year, we maintain our positive outlook for U.S. equity market returns. Our views are supported by improving sentiment, stimulative monetary and fiscal policy initiatives, and a high level of available cash to invest. However, I expect that the road will be bumpy, and the future gains will not be as rapid and steep as we experienced in March through May this year.
e-fundresearch: Which fundamental factors are currently most crucial for North-America equities?
Seung Minn: Currently, I believe it is important to focus on a company’s ability to control and reduce expenses. Given the poor economic environment, it would be difficult to sustain the growth of the revenue base, thus US companies have been aggressively reducing costs to “make the earnings”, and they have been doing a great job. This flexibility of controlling expenses is one of the key advantages of the US companies.
I do want to emphasize that we continue to focus on a more important long-term fundamental factor, the organic revenue growth. We look out 2 to 3 years and gauge whether the revenue growth will continue, or in case it’s been declining, whether it will return. For this purpose, we also consider other qualitative factors such as the company’s innovation power, franchise value, market share and competitiveness to help us determine the company’s future revenue growth potential.
e-fundresearch: Which over- and underweight positions are currently implemented in your North-America equities?
Seung Minn: At the end of June, our Fund’s portfolio held 49 stocks with some major overweights in Technology and Healthcare sectors, and underweights in Financials and Utilities sectors. Our top 5 overweight positions were Apple, Johnson & Johnson, Corning, Starbucks and Variain Medical Systems. Our top underweights were some large -cap names that we didn’t hold such as Exxon Mobil and Microsoft.
e-fundresearch: What is your view on the valuation of North American equities at the moment?
Seung Minn: At the end of today, July 23, the SP500 index stands at 976. Based solely on fundamental expectations looking out short term, say 1 year or so, it seems that the US Equity market is fairly valued. However, it does not mean that a further upside is limited for our portfolio. Because our performance is mainly driven by stock selection, we look at stock picking opportunities, and it looks better than last year. For example, correlations among U.S. stock prices reached peak levels at the end of 2008 as investors sold indiscriminately based on the weakening global macroeconomic outlook. While major market indexes have rebounded strongly in recent months, many stocks continue to discount bad news and valuations remain attractive. Moreover, correlations have come down to more normal levels as investors returned to a focus on company-specific fundamentals. Therefore, this should provide greater opportunity for bottom-up stock picking.
e-fundresearch: How did the economic and stimulus packages influence North-America equities and which effects will arise from them in the next 6-12 months?
Seung Minn: U.S equities have been strengthened considerably by aggressive monetary and fiscal policy actions. The Federal Reserve implemented numerous inititives to improve the flow of credit, which helped stabilize financial institutions and provided support for US stocks more generally. On the fiscal side, the U.S. Congress passed a $787 billion package, which was broadly aimed at increasing aggregate demand for company goods and services, as well as providing support for individuals through various social programs. Thus far, however, this initiative has had more influence on investor sentiment than on corporate earnings, as fiscal policy initiatives require more time to be allocated and take hold. In early July, the Wall Street Journal reported that only 10% of the fiscal stimulus had been dispersed. We expect that U.S. companies will start to realize more of a benefit from government spending within the next 6 months.
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