Disclaimer
This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The Investment Association (IA) North America sector drew in £469m in assets in March alone1, making it the second most popular sector for ISAs. Much of this investment in US equities is flowing into a handful of dominant companies, creating risks for investors. However, at the same time, it is opening investment opportunities elsewhere for investors willing to delve deeper into US markets.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The concentration in the US market is acute, with the Magnificent Seven dominating returns in 2023 and early 2024. This collection of companies – Amazon, Meta, Alphabet, Tesla, Nvidia, Apple and Microsoft2 - is seen as being in prime position to benefit from the growth of artificial intelligence. These companies accounted for around 60% of the gains in the S&P 500 last year3.
This has left valuations looking stretched. While some of the Magnificent Seven are still delivering impressive earnings growth4, it is by no means universal. Where companies have disappointed the market’s high expectations, share prices have been hit hard5. There may be risks inherent in excessive concentration in just a handful of companies when investing in North America.
Market environment
It is also worth noting that the environment has changed significantly since the start of the year. At the start of the year, financial markets were optimistic about interest rate cuts after the Federal Reserve issued an optimistic statement on rate cuts in 20246. However, since then, inflation has come down, but has remained higher than expected7. This means interest rates are likely to stay higher for longer.
This is a different backdrop for markets and one that, in our view, is likely to value a different type of company. We believe predictable and consistent growth, compelling valuations and a growing dividend may become a greater priority for investors.
This does not mean sacrificing growth when investing in the USA. The BlackRock Sustainable American Income Trust (BRSA) has significant holdings in sectors such as healthcare, which are supported by good, long-term demographic trends and innovation. The new range of weight loss drugs is an important example. GLP1 drugs8 are an important breakthrough and create significant growth potential for the sector. There are also promising developments in areas such as oncology and Alzheimer’s. The market has chosen to focus on the growth potential of AI, but that doesn’t mean there isn’t growth to be found elsewhere.
Lower valuations
The narrow focus has left valuations in the broader US market looking more attractive. In the rush to participate in the AI boom, many interesting and resilient companies have been overlooked. Our analysis shows that projected earnings growth in the remainder of the market is higher than for the Magnificent Seven over the next 12 months9. It is good investment practice to diversify your portfolio across a range of sectors and we believe this is particularly important today when investing for both growth and income in US markets.
There are early signs that market leadership is already starting to broaden out as markets adjust to interest rates being higher for longer. As part of this, value, quality and sustainability characteristics may come into favour again. As the US economy continues its recent run of strength, we believe this may signal the future for the US market and investors should be prepared.
1 The IA - fund statistics - March 2024
2 CNN - The Magnificent Seven Explained - May 2024
3 Investors’ business daily - 2 'Dynamic Duo' Stocks Drive 57% Of The S&P 500's Gain This Year - January 2024
4 CNBC - Nvidia Earnings Report - May 2024
5 Yahoo Finance - Tesla Stock Tumbles - May 2022
6 CNBC - Fed holds rates steady, indicates three cuts coming in 2024 - December 2023
7 Reuters - US consumer inflation resumes downward trend as domestic demand cools - May 2024
8 MayoClinic - GLP-1 agonists: Diabetes drugs and weight loss
9 BlackRock, April 2024
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust-specific risks
BlackRock Sustainable American Income Trust plc
Capital Growth / Income Variation, Currency Risk, Derivatives Risk, Derivative Risk (Derivatives, Options, Covered calls) , Gearing Risk, Investment Trust Disclaimers
Capital Growth / Income Variation
Investors in the Fund should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed.
Currency Risk
The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Derivatives Risk
Derivatives may be highly sensitive to changes in the value of the asset on which they are based and can increase the size of losses and gains, resulting in greater fluctuations in the value of the Fund. The impact to the Fund can be greater where derivatives are used in an extensive or complex way.
Derivative Risk (Derivatives, Options, Covered calls)
The Fund uses derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Investment Trust Disclaimers
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
Important Information
In the UK: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
UK Investment Trust Funds: This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
The investment trusts listed above currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.
BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
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