A number of commentaries I have read and listened to recently have been on the same theme, the US economy. Officially US growth is now in its longest expansion in history and with a dramatic shift in monetary and interest rate policy by the Federal Reserve, the US central bank, both equities and bonds have rallied in the US and elsewhere in 2019 after a sharp sell-off in the last four months of 2018. Recently the Dow Jones Industrial Average, the S&P 500 Index (the most representative stock market index of the US economy) and the technology laden Nasdaq all posted new highs.
Not all is rosy however with risks and threats from a slowdown as US tax cuts fall out of the equation, trade wars, political risks and a rising oil price. However when you look beyond the headlines the position is more nuanced and complex. Here are some random facts and observations from industry professionals that I found particularly interesting:
*China is expected to overtake the US as the world’s largest economy in 2020 according to John Husselbee, head of multi-asset at Liontrust. He sees ongoing geopolitical and economic tensions to be ongoing between the two superpowers even beyond the issue of tariffs, for example on the adoption of US or Chinese technology. I also suspect that the US economy will retain its global dominance even if the numbers place it in second place. So it might be the case that if China sneezes the world will catch a cold but if the US sneezes the world will get flu. One reason is that oil, gold, commodities and many emerging market bonds are all priced in dollars.
*The US economy has slightly decelerated in the first half of 2019 although according to Charles Kantor, portfolio manager of the Neuberger Berman US Long Short Equity fund (from an article in Investment Week along with the quotes from Pichoud and Lau below) the US macroeconomic backdrop is positive and supportive of growth. Karen Ward, a Chief Strategist at JP Morgan observed the US consumer economy is strong with low unemployment, wage growth and good personal balance sheets. However in my view rising inflation and a return to a policy of interest rate rises could be change this assessment.
*Adrien Pichoud, chief economists and head of multi-asset at SYZ Asset Management highlighted concerns about the US industrial sector where export order growth, CAPEX (capital expenditure) and job creation have effectively ceased. The question is whether this will be contained in the industrial sector or impact the wider economy.
*Larry Lau of the Trium Diversified Macro fund observes that fiscal measures to encourage corporate America to repatriate business back to the US has led to a mountain of debt whilst concerns about global trade incurs costs for business.
*The Bank of America Merrill Lynch’s monthly sentiment survey of fund managers showed investors are at their most bearish since the global financial crisis. Global managers have cut exposure to equities to a 21% underweight, the lowest since March 2009. I have to admit that surprised me.
So what are to make of it all and what are the prospects going forward. Those who called the end of the US bull market clearly have got it wrong. Three or four years ago I remember fund managers saying that the US was very highly valued and they were reallocating capital to the UK and Europe which were more attractively valued. The US market has continued its rally driven by earnings growth. It has been a gift that keeps on giving. I conclude there are potential rewards from equities and clearly risks as well. Whenever is this not the case? Karen Ward suggests to position portfolios defensively there should be a shift from smaller companies to large companies and from growth to value.* You will recall during recessions smaller companies fare poorly – evidence of this surfaced in late 2018 where prices were particularly badly hit. She also suggests a focus on quality. This will include companies with low levels of debt, strong barriers to entry and sustainable cash flows.
I conclude there are good reasons to be invested in equities especially for the long term where you can ride out the short term volatility but also reasons or be cautious. I like Terry Smith of Fundsmith Equity fame. He takes the view even if you can accurately predict the global economy what can you do about it? He concentrates on what he can control – picking high quality companies and holding them for the long term. It has been a very successful investment strategy. I love his comments on his fund fact sheet:
No Fees for Performance
No Up Front Fees
No Nonsense (my favourite!)
No Debt or Derivatives
No Market Timing
No Index Hugging
*Growth and value investing are frequent terms you will hear banded about. The article from the US Fidelity website offers a good explanation:
The content of this blog is based on my own understanding of US economy and is intended as general investment information only. Nothing in this article should be construed as personal investment advice for example to buy equities or US funds. You should seek individual advice based on your own financial circumstances before making investment decisions.