Artemis' Weldon positions for low inflation

Artemis' Weldon positions for low inflation

Cormac Weldon, who runs the £1.1bn Artemis US Select fund, is not expecting US inflation to rise sharply, despite the continued economic growth and lower unemployment.

Fewer workers looking for a job should mean a reduction in the supply of workers relative to the demand for workers, and so wages rise, and with the need to pay higher wages prices rise, and so inflation happens.

But Mr Weldon said there is much less wage pressure in the US economy than might be expected because there are many people who were out of the labour market, that is, not seeking work, who are now re-entering the labour market as economic conditions improve.

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This means the supply of workers is rising at about the same pace as the demand for workers, and with supply and demand in equilibrium there is little reason for wages to rise.  

This is part of the reason why Mr Weldon has relatively little exposure to US banks.

Mr Weldon said banks have performed poorly as investments in recent years due to persistently low interest rates. Low rates mean banks make little return on the bonds and cash they must hold for regulatory reasons, denting profitability.

He added: "If one does feel that an economic slowdown is coming, well banks don’t tend to perform well in a downturn, so we are underweight those now."

His fund has returned 63 per cent over the past five years, compared with 51 per cent for the average fund in the IA North America sector in the same time period.

A criticism frequently levied at the US market is that share buybacks have flattered the performance of the stock market, and that many of the companies buying back the shares are using borrowed money, which makes the policy unsustainable.

Company chief executives often benefit from share buybacks because reducing the number of shares in issue boosts the earnings per share of a company, and it is on this metric that a chief executive's bonus is often calculated.

But Mr Weldon is less concerned about that. He said: "I would prefer the company to use its capital to buy back its own shares rather than engage in reckless mergers and acquisitions activity.

"The reason share buybacks are so prevalent in the US is that capital gains tax is lower than dividend tax, so it is more efficient for companies to pay shareholders via buybacks.

"And when people talk about borrowing money to fund buybacks, that comes about from looking at the average company, which is borrowing money, and the average company is buying back shares.

"But in reality, you can’t buy the average company, some are borrowing money and some are buying back shares."

Charlie Morris, head of multi-asset at fund management firm Atlantic House, said: "The US economy has been stronger than the rest of the developed world, mainly due to a fixed banking system, less regulation and being the host of the second great internet wave.