4th July 2013
The Mindful Money fund manager interview
The US economy and market has rebounded robustly since the financial crisis and its importance cannot be underestimated given it accounts for almost a fifth of the world’s GDP. The outlook is improving too, with economic growth forecast by the IMF to be 1.9 per cent for 2013 and 3 per cent in 2014. The US stock market has recovered too having returned 103 per cent since March 2009. Philip Scott talks to US expert Cormac Weldon who manages the Threadneedle American and Threadneedle American Smaller Companies funds about his outlook and key stock picks.
The US appears to be looking in much better shape these days, is this sustainable?
It certainly helps to have a functioning banking system, this is very important. When the crisis hit, it was quick to address this, taking action back in 2009. Its banking system is in better shape than the UK and certainly Europe. Economies need credit to function and notably the housing market, which suffered during the crisis, appears to be enjoying a solid recovery. The average wage buying the average home has never been more affordable. And sales are expected to pick up. Employment levels are good too and slowly improving. The housing market bottomed-out in March last year after enduring a fall of some 35 per cent from its peak. Then there is the shale gas story. At one point people were talking about the US running out of energy but now it is looking towards a future of energy dependence. Gas prices elsewhere, in Europe for example, are much more expensive and this gives the US a competitive advantage as manufacturing becomes cheaper. In addition, in terms of dividends, US companies are very profitable right now and have a lot of free cash-flow, returning cash to shareholders is becoming a more popular trend.
What investing opportunities has this thrown up?
Housing demand creates further demand for other goods. When people are moving into a new home they inevitably invest in the likes of a new carpet or electrical goods for example. Home Depot is one of our largest holdings in the American fund. It is a massive US retailer, in the vein of Homebase in the UK, only much bigger. It sells tools, tiles, washing machines – a host of such goods and it deals with businesses as well as the public. This is a play on the recovery of the housing market in the US.
You are bullish on media stocks, where are you seeing opportunity?
We are very overweight media right now. One stock I would highlight is Rupert Murdoch’s Newscorp. We know the newspapers it owns over here in the UK (The Times, The Sun) but this firm also has huge television and movie assets. It targets not just the US but the overseas markets too. The media story is a very big one. For example, take broadband; penetration in the US is some 90 per cent while in the UK it is nearer to 50 per cent. There has been a clear growth story in pay-per-view television in the US. As a result of this, firms there have the ability to sell films over and over again, all over the world. People consume media is a variety of ways these days, not just on television but on tablets like iPads.
You are also invested in Apple and Google what’s your outlook for them both?
Right now we are underweight Apple. We had been overweight, in that we owned more than we do now but we sold off some last year. But we think at some point it may be time to top-up and investment more – go overweight again, as it brings new products to the market such as the much talked about lower-end iPhone. In regards to Google, quite simply, it remains a natural monopoly. The vast majority of us use it and more and more commerce is being done online these days.
Financials is another key play for the fund, what stocks would you highlight?
As we are all using plastic more frequently to buy goods, a key holding for us is payments services group VISA. It is more weighted to the US than its competitor Mastercard. We also like Discover Financial Services, a direct banking and payments company which offering credit cards, banking products, loans and payment services. In terms of its customers it tends to lean towards the middle income demographic and is very focused on its cash-back cards.
What your thoughts on the potential reduction of the US Federal Reserve’s quantitative easing (QE) programme which has helped boost its economy?
The tapering of QE is going to weigh on the market but the Fed is being very accommodating. It could not have been clearer in its wording – the economic data has to remain positive in order for this to happen – if the data and figures turn negative, it is not going to reduce the stimulus programme.