Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Dennis Ruhl, U.S. equities fund manager for JPMorgan.
Hello, Dennis.
Dennis Ruhl: Hi. How are you?
Wall: Very well. Thank you. So, you have a dual mandate as it were for JPMorgan; one, you run U.S. equities, but you're also the behavioral science expert. So, I'm going to try and combine your two areas of specialty when talking about the U.S. market today. In the UK we've had the opinion it's been pretty toppy for the last two years, but it's been a market that's kept delivering.
Ruhl: Yeah. So, when we look at the U.S. market, I think, we think it's closer to fair value, perhaps slightly extended but not at a level where it's going to impair returns. When we look at, let's say, P/E, although the same is true for a variety of valuation metrics, it's slightly more expensive than its 25-year average. But we think that's in line with what we see right now where the economy is in fairly decent shape. Markets as a whole are in fairly decent shape.
And when you look at the long-term history, when you start from this valuation point, the average return that you get is sort of mid to high-single digits. When you look around the world globally, we think that's quite attractive, especially versus other asset classes, particularly fixed income where although returns have been very strong, you have a very, very aggressive starting point in terms of rates. So, we think right now the U.S. equity market is pretty attractive.
Wall: I suppose though it is a case of being selective because a few years ago or five years ago you could have just bought a passive fund for U.S. equities and seen significant returns. Now, are there particular sectors you expect to do better and indeed those that you expect to do worse?
Ruhl: Yeah. So, what we've seen is that whereas we think overall the U.S. equity market has been in fairly healthy shape, the internals of the market have been very challenging and in particular, there is a lot of fear in the environment that is causing stocks that are perceived as higher volatility to underperform a lot and stocks that are perceived as lower volatility to outperform.
So, when we look at the spread, the difference in valuation between highly volatile and not that volatile stocks, it's very, very large relative to history right now. Because of that we tend to see most of our opportunities in more volatile names or names that are perceived as more volatile.
Two areas that I would highlight within that. The automakers, GM, for instance, is at about 6.5 times earnings, 5% dividend yield. Again, we understand the fear that the consumer economy is going to turn and that the business fundamentals will fall apart, but we just don't see that happening and if that doesn't happen, at those sort of valuation metrics, it's around half or slightly more than that versus its long-term average.
Similar story, the airlines. So we prefer Delta and United, but really you can talk broadly about the space. Stocks that are trading at around 6.5 times earnings, again on this perception that they are very volatile businesses that they are very volatile companies, we think that is more a legacy perception. Historically, airlines have been able to trade at 12 or 13 times. To get to that multiple requires either the earnings to half or the stock to double. We think it's more like that the stock doubles.
So, we think there are some very, very attractive opportunities. And clearly, from the starting point of the markets active management and being in the right stocks is more important than the last five years where a rising tide has lifted all boats.
Wall: And that is the crux of the matter and indeed, where the behavioral finance comes in, because volatility is perceived as risk by a number of investors and they are shying away from those types of stocks.
Ruhl: Yeah, absolutely. And we think they shouldn't be. So, in fact, when you look at it, there are two issues. There's volatility and there's perceived volatility. What markets are reacting to right now is more perceived volatility than actual. So, to give you a concrete example, if you look at a domestic company, like Pilgrim's Pride, which produces chickens, that's a fairly stable business, located in the consumer staples sector.
On the other hand, if you look at what's been winning in consumer staples, it's really these very large mega-cap companies that have exposure to international economies, they have exposure to Europe, they have exposure to the UK. We think given where the economic concerns are people should be favoring U.S. companies, but what they are instead favoring is the perceived lower volatility of stocks that they've heard of versus mid-cap or small-cap companies that are perceived that are domestic companies but have a higher perception of volatility.
Wall: Dennis, thank you very much.
Ruhl: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
