Lacklustre global growth rates are the biggest threat to US equities being blown off course, a top-performing manager has claimed.
Artemis’s Cormac Weldon was in a bullish mood about the health of US companies and even the strength of the world’s largest economy, but he accepted if weak global growth spooked markets then the stocks he bought could be negatively hit.
Mr Weldon, who joined Artemis with the majority of his team in a shock move from Threadneedle last year, said this was now the “most obvious potential downside” for US equities, which he expected to deliver high, single-digit growth this year.
The fear about weaker growth in other economies became more of a reality last week after the World Bank cut its global growth forecasts, lowering predictions for 2015 GDP growth from 3.4 per cent to 3 per cent.
This pushed stockmarkets into the red last week, with all bourses down for the day on the predictions.
The manager had predicted a “wobble” in equity markets in September 2014 – triggered by falling sentiment due to interest rate rises and slowing growth – and the markets had two brief sell-offs in October and in December.
“The global economy is now even slower than it was back in September so there is scope for a shake-out and increased volatility in the US market,” he said.
Mr Weldon said he had been “pretty cautious on anywhere outside of the US” in 2014 and was now “even more cautious” as conditions continued to deteriorate.
However, he said that just as in October and December last year, any sell-off was unlikely to be too severe.
The historically low valuation of equities compared with bonds seemed to be providing a floor to the US stockmarket, he added.
Even though the valuation of the US stockmarket was higher than most other major markets, and was high relative to its history because US government bonds were even more expensive, equities looked good value in comparison, Mr Weldon said.
He suggested the other main risk to his rosy outlook for the US was if the Federal Reserve raised its interest rate at a more “aggressive” pace than the markets expected.
The markets are now expecting the central bank to be less aggressive than it had previously suggested in the minutes from its most recent Federal Open Markets Committee meeting, the manager said.
This outlook is based on falling inflation figures and the slowdown in global growth, which experts now think will force the Federal Reserve to be more cautious about tightening monetary policy.
But if the central bank went ahead with its current plan, or even raised rates further and faster than suggested by the latest minutes, Mr Weldon thought the markets could be shocked into a sell-off, although he said such a scenario was “unlikely”.
In spite of the potential headwinds, Mr Weldon said there were several tailwinds that should be positive for the US economy and stockmarket this year.
He pointed to the huge effective “tax cut” for consumers from the lower price of oil – which was expected to lead to increased spending and therefore economic growth – as a significant boost for the US.
He has been adding to several consumer discretionary stocks across his US funds, such as Home Depot and Advanced Auto Parts, in order to take advantage of this increased consumer spending.
Mixed start for Artemis US range launched by Cormac Weldon
The five new funds launched by Artemis last year for Cormac Weldon and his team have had a mixed start in terms of raising assets.
While the Artemis US Select fund has already raised £140m, the Artemis US Equity fund has yet to reach £10m.
The main difference between the funds is that US Select is slightly more concentrated, investing larger amounts in fewer stocks.
Mr Weldon suggested the reason US Select had gained more traction so far than the other funds was because it was a similar strategy to his flagship American Select fund, which was hugely popular when he was at Threadneedle.
But he said it was possible that investors were becoming increasingly attracted to more concentrated funds, given the spate of recent coverage about ‘closet tracker’ funds, in which managers charged a high fee for active management but largely replicated the index in their stock selection.
