Are you still optimistic about the US economy?
For some time we have been saying that economic growth has peaked but the cycle has been extended. This is largely due to the resilience of the US consumer. Business confidence has faltered, as attested by the recent drop in CEO confidence. And it is likely to continue to be muted in the run up to the 2020 presidential election. So we are seeing lower growth in capital expenditure and expect it to slow down further next year.
But the US economy is 70% dependent on the consumer. Employment prospects remain very good, wages are growing and people generally have low levels of debt. As a result, consumer confidence and demand are high and this is helping to extend the economic cycle. The net effect is that economic growth is slowing, but we still expect it to grow at 1-2% over the next year.
Clearly protracted negotiations with China over trade could have a dampening effect on the economy. Do you think they are likely to make progress?
Given President Trump wishes to be re-elected next year, some commentators are optimistic that he will make concessions in order to boost growth. We are not so sure. It is clear from President Trump’s record that he has always been anti trade and pro tariffs. We think he is unlikely to abandon that position. In the run-up to the election, he will want to show that he is standing firm on tariffs.
Beyond the Trump administration, there is a wider consensus that China is a problem that needs to be dealt with, particularly in regards to the theft of intellectual property. It will be difficult for China to provide the reassurances the US wants on this area. We don’t think this will be resolved any time soon.
What are your thoughts on next year’s presidential election? How will it affect the market?
At the moment, left-winger Elizabeth Warren appears to be the front runner to be the Democrats’ nominee. If and when she wins the nomination, many commentators expect her to move to a more centrist position. We are not sure about this overall, as some of her policies could prove to be popular. However, we do think that she will change her stance on healthcare. Her proposal of ‘Medicare for All’ is too expensive to be workable. It is also very unpopular with voters.
Recent opinion polls suggest that 70% of Americans are happy with their current health insurance and do not want the system to change. Of course at present it is not definite that Elizabeth Warren will win the nomination but if she does and retains her more left-leaning policies, it would be viewed as a potential negative for the market. That being said, if she keeps some of her policies (particularly on healthcare) we don’t think she could win the presidential election.
Turning to the Republicans, they have had many opportunities to abandon Trump but have not done so. So we think he is most likely to be their candidate again.
Finally we would add that most elections are about the economy. The economy is still doing well so it may be that the more market-friendly Republican Party will win again.
What recent changes have you made in your funds?
In Artemis US Select, we have reduced some of our more highly valued growth stocks and added a few ‘value’ stocks (that is, stocks that are on below-market valuations). We think the recent rotation into cheaper stocks will continue. Some of their share prices appear to be anticipating a recession, which we do not think likely in the near future.
Additions include JP Morgan and Apple. In summary, we have a little more value in the portfolios than we did a few months ago. Overall, we would characterise most of our holdings as ‘growth at a reasonable price’, which we think is the most appropriate stance given the slowing economy.
On sectors, our largest overweight is in consumer discretionary. This covers a very wide range of companies. Our largest underweight is energy. We have recently reduced the underweight in financials, and are now about level with the market. Financials are also a very diverse sector. Our holdings include high-quality companies like MSCI and S&P Global, which have recurring revenues and robust earnings.
We’ve also recently reduced the underweight in technology. Within healthcare, we are underweight pharmaceuticals and biotech and overweight healthcare insurers. We think the threat of ‘Medicare for all’, which would see insurers abolished, is very unlikely to come to pass.
In the Artemis US Smaller Companies Fund, we have followed a similar strategy of adding to value stocks. This is only at the margins and we retain our high-quality stance. Additions include LPL Financial (a wealth manager) and Eagle Materials (building materials).
To find out more about the Artemis US Select Fund and the Artemis US Smaller Companies Fund and their positioning visit the fund pages at www.artemisfunds.com.
THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS.
The funds are a sub-fund of Artemis Investment Funds ICVC. For further information, visit www.artemisfunds.com/oeic. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
