David Kimberley
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Updated 29 Jul 2022
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Since invading Ukraine in February of this year, Russia has found itself struggling to pay off its dollar-denominated debt. Although it has the reserves necessary to do so, sanctions mean that it has been unable to access the funds, which have been frozen in accounts abroad.

This has led some to speculate that the US is shooting itself in the foot. Even if these sanctions are effective in the short term, the asset freeze may hurt the dollar’s position as the global reserve currency, damaging US interests in the long run. The reason being that countries will not want to hold their reserves in dollar-denominated assets if they can be denied access to them at the snap of a finger.

It’s common for the people making this argument to give the impression that the dollar was hoisted upon an unwilling world, as opposed to it becoming central to global trade because it offered stability, security, and was thus widely accepted. And although more hawkish monetary policy may partly explain its rise so far this year, the flight to dollar-denominated assets since the war in Ukraine began suggests many people around the world continue to believe the US and its currency possess those traits or, at a minimum, that they’re superior to anything else available.

Of course, demand for dollar assets doesn’t say anything about the quality of prospective investments in the US. But it is at least a sign that, despite its many flaws, America continues to be regarded as a relatively stable place that can be relied upon to either protect capital or deliver returns to investors.

Admittedly, it’s easy to forget this in a year that has, at least thus far, seen the S&P 500 fall by close to 20%. However, analysts at JPMorgan American (JAM) believe that average earnings for the index – which is also the trust’s benchmark – are likely to increase by 11% this year and by 6% next year. Rising inflation will obviously impact how meaningful that growth is in real terms, but it is positive nonetheless.

JAM is something of a ‘one-stop shop’ for US investors, with an even split of growth and value stocks, as well as a small allocation to small caps. Despite its value holdings, the trust has managed to beat the S&P 500’s returns, as well as its peer group average, since managers Timothy Parton and Jonathan Simon were appointed in June 2019.

The trust has long been overweight to financials and the managers believe these investments are likely to perform well if interest rates continue to rise. These holdings have also supported the trust so far this year, as the managers have delivered relative outperformance of their benchmark.

Looking beyond the macroeconomic turmoil of today, the blend of value and growth looks like it may be well-positioned to take advantage of the opportunities that the US provides. Of course, sceptics may say there are better opportunities elsewhere. The events of the past few months suggest otherwise. As one famous investor wrote not too long ago, ‘never bet against America’ – you may regret it if you do.

Past performance is not a reliable indicator of future results

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