Good resilience in economy good for equities, says FTI’s US Ops manager Bowers

Grant Bowers, vice president and portfolio manager of the Franklin US Opportunities fund, says US stockpickers need to beware ongoing political and other risks, but resilience in the economy is helping.

We believe there are reasons to be constructive about US equities in 2013. With the near-term resolution of several US “fiscal cliff” issues regarding scheduled tax hikes and spending cuts, as well as with the continued compression in long-term interest rates and credit spreads, we view equities as an attractive asset class at this time. However, we anticipate an increase in market volatility as we gain clarity on possible solutions to the US budget deficit and the timing of legislative action.

We are hopeful that compromises will be made between the Obama administration and party leaders that will help to mitigate the impact of higher taxes and spending cuts-which look to be unavoidable if we are to address the budget deficit. Longer term, however,we believe the opportunity to set the US on a path towards fiscal sustainability over the next decade may provide a meaningful stimulus to the US economy, companies and equity markets overall.

From an investment strategy standpoint, market volatility has led us to reevaluate position sizing in our largest and smallest holdings, focusing our efforts on names in which we have the highest conviction. Sector positioning also changed marginally over the course of 2012, with allocations to consumer discretionary and materials rising modestly and allocations to information technology and industrials declining. At the margin, we have been examining the ramifications of slowing growth in other parts of the world on companies with multi-national exposure.

We have been finding opportunities to add to companies with higher domestic exposure to the US that we believe can take advantage of trends we have been seeing domestically. One of these trends is the US manufacturing renaissance we have been observing as a theme that can potentially benefit US equities broadly. A confluence of factors augment this view, including rising labour costs in India and China, abundant shale discoveries in North America leading to lower natural gas prices (input cost), a declining US dollar, and higher shipping costs. Increasing manufacturing capabilities could lead to US job creation as more plants are developed onshore, which has a potential trickle-down effect on such important economic areas as housing and consumer demand. We are also constructive on technology demand, particularly in areas such as storage, security and wireless data. We believe these sub-industries have positive longterm growth drivers at the consumer and enterprise level.

Despite fiscal concerns in the US, we believe certain sectors of the economy have continued to improve. The steady strengthening of the US housing market in 2012, particularly a rise in home prices and stronger new and existing home sales, is positive in our view. We believe the housing sector plays a crucial role in stimulating the economy due to its ability to create personal wealth, improve consumer confidence and, in turn, potentially energise consumer spending-an important fuel for gross domestic product growth.

Other positives include a steady rise in commercial lending, a significant drop in the household debt burden and the newly accessible abundance of low-cost natural gas. We believe these trends point to continued moderate economic growth, provided that fiscal issues are constructively addressed.

In 2013, we remain focused, as always, on our strategy of investing in innovative, fast-growing companies that are leaders or emerging leaders in their industries, particularly those demonstrating increasing profitability or growth potential relative to the overall economy. Our bottom-up, fundamental research process is used to identify and evaluate companies we believe have the characteristics of growth, quality and valuation. In an unpredictable investment landscape, we strive to continually and realistically assess a security’s upside potential and downside risks and execute our disciplined sell process if better alternatives emerge. Likewise, market volatility has frequently presented us with attractive investment opportunities in some of the world’s leading growth companies.

In conclusion, we continue to believe the US is well positioned in the global economy and US equities are an attractive investment. The country’s corporate sector is financially strong and competitive, and many stocks remain inexpensive relative to historical valuation levels, in our view. We expect gradual economic recovery in the US to continue, fiscal issues to be addressed and increased investor confidence going forward.

 

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