It may have been a rough quarter on markets, but the fundamental growth story in the US remained largely strong, as unemployment reached new lows and headline GDP growth continued to climb.

On 6 October the Federal Reserve Bank of Atlanta raised its US GDP growth estimate for the third quarter to 1.1%, citing improvements in retail consumption figures due to increased car sales. On 8 October Christine Lagarde, head of the International Monetary Fund, said in a speech that the US recovery was broadly on track.

For Hamish Douglass at Magellan in Sydney, manager of the St. James’s Place International Equity fund, his large US allocation has brought strong returns in recent months, and he points to the housing recovery and a strong US dollar as the most important tailwinds.

“More than 50% of the companies in our portfolio are domiciled in the US,” he says. “The first element we’re overweight to is economic growth in the US, particularly the housing recovery.”

New housing starts are running at around 1.2 million a year, whereas at the bottom of the financial crisis that figure was just 450,000. Douglass foresaw the recovery around four years ago, and invested in Lowe’s and Home Depot accordingly, which account for 10% of the portfolio. The two companies are leaders in the US home improvements market and in the last 12 months have provided strong returns.

His second view was to take a strong position on the US dollar, which was based not just on expectation of strong US growth but also on currency specifics.

“The dollar has been particularly strong over the past 12 months,” says Douglass. “We had a view on that, and now the dollar is up 20% on a trade-weighted basis.”

Buying corporate America

In times of global uncertainty, the dollar often strengthens: an improvement in domestic consumption is a more significant reason to invest in US companies. Yet recent weeks have seen US indices dip severely. The question is when market conditions will begin to favour equities more broadly, rather than simply in select areas such as housing.

“The key issue is when monetary policy will start to tighten,” says Douglass. “As the Fed begins to tighten, and as the European Central Bank stops printing money, there will be a fundamental change in conditions, and higher-rated credit will start to get repriced. We’re already seeing the early signs.”

Douglass expects equities to start repricing as rates rise, and is preparing to increase the portfolio’s equity allocation as and when that happens. In her speech on 8 October, the IMF’s Christine Lagarde said she expressed her view that a US rate rise “is approaching”. For Douglass, that will act as something of a trigger.

“We know prices could be volatile, but we think the opportunities will come,” he says. “What we would describe currently as expensive defensives have been affected by Bank of Japan and ECB quantitative easing. We’ve only got 25% of our portfolio in them at the moment but we expect them to reprice. As rates go up, we would like to increase our exposure in some of those high-quality defensive businesses.”

Hamish Douglass of Magellan is the manager of the St. James’s Place International Equity fund. The opinions expressed are those of Hamish Douglass and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.

Please be aware that past performance is not indicative of future performance. The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Returns on equities cannot be guaranteed.