Why the current rally in the US dollar should not deter equity investors
The recent rally in the US dollar is not the start of a multi-year trend and should not discourage investors from US equities, Legg Mason ClearBridge’s Evan Bauman has said.
The manager of the group’s $4.8bn Legg Mason ClearBridge US Aggressive Growth Fund said much of the recent period of strength for the currency has been priced in to equity valuations, with the dollar story unlikely to have a long-term impact.
“We don’t typically have significant macro views unless we think they are 5-10 year trends, and a lot of this story has finished now,” he said.
“Dollar strength is something that has impacted earnings to this point, but the dollar trade is now pretty crowded.”
Bauman believes many of the most attractive sectors within the US equity market are unaffected by the stronger dollar regardless, and continue to offer opportunities.
“Areas like cable and domestic healthcare companies are virtually immune to any headwinds from the dollar, so a lot of names are protected and should continue to be successful regardless,” he said.
Rather than panic over the impact of a firmer dollar, Bauman said investors should concentrate on those names which have the ability to increase earnings and cash flows.
“We try to pick companies which can withstand external pressures,” he said.
Bauman and the team are also favouring energy names following sharp falls in commodity prices, with some energy prices trading around 50% lower than a year ago.
“The energy sector has been the focal point of our portfolio activity in the last nine months, and we have increased positions in our existing holdings,” he said.
“Valuations for some energy companies are the cheapest in history. There have been predictions from energy CEOs that as much as a quarter of the industry won’t exist in two years, and if that came to pass it would mean bankruptcies, and big cutbacks in production, capex and spending. But ultimately it will lead to a much healthier supply/demand dynamic for the survivors.”