As we recently highlighted in our Global Market Outlook Navigating a Bumpy Landing, we expect market uncertainty and volatility to persist for some time, leading to an uncertain journey ahead with a wide range of possible outcomes. In US equities, our outlook continues to favour a relatively defensive approach, using Dividend Aristocrats or domestic core equity exposures.
From a macro perspective, we believe the “most anticipated recession” remains the base case for the US market. We are seeing rapid disinflation coincide with recession fears, albeit with upside risks and therefore slower relief from central banks. Energy prices remain the biggest risk to outlook both from China reopening as well as supply disruptions. US equity investors should prepare themselves for an ebbing in the US dollar strength trade. Here we take a broad view of the US equities opportunities, so that investors can consider what to do next with their portfolio orientation.
Small caps, relative to larger companies, tend to be more cyclical and more domestic. Constituents of the Russell 2000 Index and MSCI US Small Cap Value Weighted Index generate around 80% of revenue within the US, while for S&P 500 Index the corresponding number is 60%. This means small cap stocks face less headwind from the relatively strong US dollar and more support from the remarkably resilient domestic market. This fund could be interesting for investors who believe that the US consumer will lead the next market growth cycle.