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Is the US still an attractive investment opportunity?

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

Ongoing trade tensions may be among the greatest concerns for those investing in the US. We consider the impact of President Donald Trump’s recent announcements, and the outlook for investors.

Click to toggle accordion What you’ll learn:

How US markets have performed amid ongoing trade tensions.

Which other factors could affect the US stock market in 2018.

How to gain exposure to the US stock market.

Trade war fears have rattled US markets this year, but despite these worries they have continued to post gains.

The S&P 500, the US’s main benchmark index, and the NASDAQ index of leading technology shares, retreated from their bull run following President Donald Trump’s decision to impose tariffs on steel and aluminium imports in May, but investors soon shrugged off the announcement.1

The US is imposing tariffs of 25% on steel from the European Union, Canada and Mexico, and 10% on aluminium, the Department of Commerce has announced. Meanwhile, other trading partners, including Brazil, South Korea and Australia, will face quotas on metal imports.2

The muted stock market reaction, according to some commentators, may be due to the proposals not being considered to have a large enough impact to stall US economic growth.  May’s jobs report topped expectations, providing a welcome boost to the economic outlook. However, the impact of rising trade tensions has yet to fully filter through, with the outcome depending on how trade partners respond, and whether there may be larger trade battles ahead.

Canada is among those that have announced retaliatory measures, with tariffs on US steel and aluminium.3 Meanwhile, other geopolitical issues continue in the background that could affect the US, such as strained US-Iran relations.

Yet the pro-growth stance of US president Donald Trump has continued to boost financial markets, despite some risk factors that threatened to take the steam out of the stock market bull run.

It’s important to note that it’s not only trade wars which could affect markets. The Federal Reserve voted on June 13 to raise US interest rates by 0.25%, to a range of 1.75% to 2%, the second increase in rates this year. 4

Further increases could affect market movements, with higher rates typically having a negative effect on technology and consumer discretionary stocks, as consumers often find themselves with reduced disposal income once borrowing costs increase.

Despite the various potential challenges facing investors, we consider why the US remains popular, and some of the different ways to gain exposure. Remember that investments may fall as well as rise, and you could get back less than you put in. Past performance isn’t a guide to the future, and any investment in the US should, ideally, form part of a diversified investment portfolio.

The outlook for the US

The US remains the world’s largest economy, and in a strong position to weather potential storms, such as a trade war.

William Hobbs, Barclays’ Head of Investment Strategy, said: “In terms of our developed market equity exposure, America has been at the forefront of most of this economic cycle so far. The continuing primacy of the US economy and its consumers, allied to the breadth and quality of its stock market, are key factors in its appeal."

“US stock markets have soared over recent years, comfortably beating the returns available in the global stock markets elsewhere.”

The passing of the Republican tax reform legislation has helped push US stocks higher over recent months, with cuts going to the wealthy and business owners, to encourage more investment.5

 “In some senses, the backdrop looks more conducive for American stocks now than at any other time in this economic cycle – the Republican tax cuts, alongside the bipartisan spending agreement, represent a substantial dollop of fiscal stimulus to an economy that is already doing pretty nicely,” said Hobbs. “Both, particularly the former, will materially lift corporate earnings for the next two years.”

However, the announcement of the tariffs imposed on some imports could shrink some of the savings from the cuts and inject some uncertainty into the stock market, alongside raising concerns about inflation. Analysts generally agree that tariffs are negative for the economy and will impact business confidence. According to the US Chamber of Commerce, Trump’s trade policies could put as many as 2.6m American jobs at risk.6                   

Yet fundamentals for the US economy remain strong, despite slightly slower growth in the first three months of 2018, at 2.2%, compared to the 2.3% that was estimated. Consumers continue to spend, and unemployment remains low.7

The US stock market has not only benefitted from improving global growth and corporate profits, but also a rising oil price, and a slide in the value of the dollar. A weak dollar benefits multinational companies that receive their earnings overseas, boosting profits when they are converted back into dollars. The reverse holds true, on the other hand, when the dollar strengthens, as this reduces the value of overseas profits.

Of course, no-one can predict with any certainty which way the US stock market will move next, but the economic fundamentals appear positive for investors who are seeking to add an investment in the US to a diversified investment portfolio.

How to invest in the US

Investors can gain exposure to a large number of US companies through UK-listed pooled funds such as unit trusts and open ended investment companies (OEICs), and Exchange Traded Funds (ETFs)which also have the potential to help reduce the volatility that can come with investing in individual company shares.

As with any overseas investment, there is currency risk, as investing when sterling is weak will increase the value and cost of overseas investments, while if the pound is strong, this reduces their value.

One option is an Exchange Traded Fund, such as the iShares S&P 500 UCITs ETC. This is a passive investment that tracks the S&P 500 index, which includes some of the biggest companies listed on the US stock market.

Alternatively, other options for investors are the Fidelity America Fund, which includes Berkshire Hathaway and Oracle Corp among its biggest holdings, and the Baillie Gifford American fund, which has some its largest holdings in Facebook, Amazon and Netflix.

Bear in mind that our mentioning of these funds does not constitute a recommendation. If you’re unsure where to invest, consider seeking professional financial advice.

Remember, the value of investments can fall as well as rise and you could get back less than you invest. We're not recommending Ready-made Investments as being suitable for you based on your personal circumstances. If you're unsure about this investment’s suitability for you, you should seek independent advice.

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