Eric McLaughlin, Senior Investment Specialist de BNP Paribas Investment Partners

What do you think about the American stock market?
We see more positive than negative catalysts for the market. Macroeconomic growth is picking up. We except a GDP increase about 2,5% this year. It is probably below the trend in terms of economic recovery that we used to see in the past in the country but it is sufficient to look an improvement in the unemployment picture.
The housing sector, which caused principally the market crash and the recession in 2008, is becoming more dynamic. Housing starts, which means constructions of new homes, are rising. This sector is very important of the US economy. It helps industrialization and consumption. Biggest part of the population is owner of their home.

We perceive no sign of price inflation in United States, notably because the inflation is globally benign in the world.


Which unemployment rate do you anticipate for the end of this year?
We see a gradual amelioration in the unemployment market. The rate could reach 7% at the end of December. It is still high if we compare with historical levels in United States.


How do you consider the evolution of the fiscal discussions?
I think the fiscal discussions remain the largest risk for the stock markets. The negotiations are going on. We had new taxes put in place in the beginning of January. Then, we had sequester budget cuts in March.
The best way to resolve the fiscal issue is to find a meaningful consensus between Republicans and Democrats. Unfortunately, it will be difficult to have it. Arguments in both sides are very strong concerning what type of deal must be put in place. Democrats don't want to do significant spending cuts and Republicans are not interested in any program that hikes taxes.
This situation is not necessary negative in an economic point of view. The deficit level will go down marginally.



What about the Fed behavior in the near future?
We don't wait anything in the front of the monetary policy of the Fed until second half of 2014, in other words until we observe a real improvement in the unemployment market. Then the central Bank could raise its interest rate.
Especially with the recovery of the housing market, we don't wait either for a strengthening of the stimulus program of the Fed. Mortgage rates are very low. Banks make a lot of lending.



Which potential of growth do you suppose for the main indexes?
American great stocks indexes are very high. S&P 500 and Dow Jones overtook levels of 2007. They are supported by earnings prospects. If we look at PE ratios, they are below ratios of 2007. Earnings are recovery much more quickly than prices and better than the analysts' expectations. This trend should continue. So we see more room for higher prices. The indexes could up another 10% by the end of the year.
The Nasdaq could perform more because it still stay very far behind historical highs reached in 1999 and 2000.

Moreover, the environment is very favorable for investment in equities. Investors are looking for yields. Nevertheless, fixed income offers very little yields.


To your mind it is better to be exposed to small caps than to large caps?
Small caps are particularly attractive in this environment. Valuations are cheaper than large caps. In 2008 small caps prices fell more than large caps prices. They haven't known the total recovery of this falling. They are priced 16,5 times their earnings. The historical average is 20 times.
Small caps have a lower correlation relative to other assets classes. They are more sensitive to American economy. Large caps are very global in their nature. 40% of the earnings of the S&P companies are generated outside United States. Small caps are lower exposed to the European crises.



How many small caps can we count? Which are the most represented sectors?
There are about 15 000 stocks that are traded in United States. 2 billion dollars are the limit of capitalization for small caps. So about 14 000 stocks correspond to this criteria.
The most represented are technology, financial. There are thousands of small banks in United States.
We have a lot of companies in the consumer sector: restaurant, retail shops.



Could you give us three main convictions?
Las Vegas Sands which is a gaming company. They have growth revenues coming from their proprietary in Macao and Singapore.
Another company is Lowes, which is the second largest home improvement stores based primarily in North America. It is a competitor of Home Depot.
We like also Cameron International, an energy company focused in oil field services, in deep sea drilling. The ability for exploration and production is improving because it is more economical.



Which are the major risks for small caps?
One risk is a slower than expected economic growth. A second risk is a policy mistake from Washington. A third risk is the sovereign debt crisis in Europe. A fourth risk is the geopolitical situation in the Middle East or Korea.
Markets are very tied together in terms of how to react.

However companies have a very conservative position, concerning their debt level, and their cash level. They increased their capacity to resist to a troubled environment.



What is the importance of small caps in your portfolio?
We manage two distinct portfolios: a small caps strategy and a large caps strategy.


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