London – 5th January, 2012. Cheap valuations and rising yields currently make US equities the best asset class in the world, says Hersh Cohen, Chief Investment Officer at Legg Mason subsidiary ClearBridge Advisors.
Cohen, who oversees more than $48bn* at ClearBridge, Legg Mason’s largest equity manager, says American stocks in general and high quality blue chip companies in particular are currently extremely undervalued given their balance sheet strength and increasing propensity to pay and raise dividends.
“Prices and yields make US equities the best asset class in the world right now,” he says. “American stocks have discounted a very negative scenario and high quality stocks have discounted the worst possible scenario. We can’t find any areas of the market that are overpriced. But companies are flush with cash and are being aggressive with dividends and share buy backs. Even some great cyclical companies are now trading at levels that look very attractive.”
Cohen says he is particularly bullish on internationally-known businesses with long track records of shareholder friendly behaviour that have suffered unjustly amid the general market gloom. “We like the blue chips where price-earnings multiples are compressed and expectations are low and can’t really get any lower, giving us limited downside,” he says.
Favoured stocks of Cohen’s include Microsoft, Exxon and – despite its exposure to the US consumer – Walmart. “Walmart has done a wonderful job of navigating the current crisis,” Cohen says. “It has done everything right both for shoppers and shareholders. Microsoft, on the other hand, is just a cash machine. Its earnings keep rising every year and so do its dividends, which now stand at 3%. Plus it will be launching the new Microsoft Office software fairly soon.”
Meanwhile Exxon has returned 14% to shareholders every year on a compound basis since WWII, says Cohen. “It’s a business that makes money in all environments and does the right thing for shareholders.”
From a wider market perspective, Cohen believes many US stocks will perform well in the early part of 2012, though he cautions the longer term picture will become murkier as government spending cuts begin to bite. “We think the surprises over the next six months will be on the upside,” he says. “But after the second half of the year, when austerity measures become more real, the situation will become increasingly uncertain.”
*As of end Sept 2011
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