No US recession on the horizon


Bowers: Why has the US bull run managed to sustain for so long?

FRANKLIN Equity Group’s vice-president, portfolio manager Grant Bowers does not foresee a recession happening anytime soon in the United States.

The two main drivers for the United States’ continued growth are consumer spending and corporate earnings, both of which have proved to be very resilient since the 2008 global financial crisis.

Bowers opines that the United States can maintain a healthy rate as at its current rate of growth is not super hot, hence giving the US economy room to continue moving forward

“If you look back from where we have been from a gross domestic product (GDP) standpoint since the financial crisis, the United States has been having that 2% to 3% growth,” says Bowers.

The United States’ GDP increased at an annual rate of 3.2% in the first quarter of 2019. In the fourth quarter of 2018, real GDP increased by 2.2%.

“People have wondered why the bull market has not died. It has been so long. The bigger question is why has it sustained for so long,”

“If you look at some of the past data on the US rate of growth, some of it has been very low. We have an environment where we haven’t built up speculative excesses. We haven’t really grown bubbles in this economy,” explains Bowers.

Thus, Bower’s belief is the current cycle will continue to play out with lower growth but over a longer period.

Bowers added that 2018 saw growth pick up because of US President Donald Trump’s tax reform.

When Trump set out to re-write the tax code in 2018, he lowered the tax rates for nearly everyone, automatically also juicing the economy.

Following that high, 2019 will see abit of a reset Bowers view is that the US will continue to put up that 2% to 3% sort of GDP growth, and this should continue until 2020. He adds that the current Trump administration does have incentives to keep the economy moving forward, particularly with a presidential election to be held next year. This typically augurs well for stocks. Nonetheless, presidential cycles aren’t part of Franklin’s analysis.

“We’ve seen corporate earnings moderate in the first quarter, but its still healthy and I think we are going to see positive earnings growth in 2019.

On the issue of valuations, Bowers view US stocks as relatively fair. He doesn’t see the US market being cheap or expensive.

“Its appropriately valued for a big economy. The market now trades at 16.5x next year’s earnings. Thats right in line with historical averages over the last 25 years,” he adds.

Bowers said that being a long term investor, they aren’t sitting around thinking when the next recession is coming and reading into every economic indicator that comes out

“We do pay attention to the economic indicators, but there is no one trigger which says we should get out of the market. The important economic indicators we do look at are inflation, and thereby interest rates,” says Bowers.

“People talk about the inversion of the yield curve. You could perhaps say that because of what has happened in monetary policy in the US, Europe and around the world over the last few years, alot of the historical relationships of yield curves don’t have the same meaning as what it use to have anymore. The historical relationship was when interest rates were at a more normalised level,”

Bowers strategy is to scout and buy the best companies in the US everyday.

“We believe that companies that come out of the US, with its culture of innovation and dynamic business models, are going to be businesses that do better regardless of whether the economy is growing or shrinking.

“We feel that our investors and clients should have exposure beyond their home markets. Wherever you are, you want to have some of these companies in your portfolio, especially if you want your portfolio to be future proof,” says Bowers.

He adds that it isn’t just the US which is producing great companies.

Some are coming out of Europe, from China.

“You want to have them because they are going to be the winners 3, 5, 10 years from now,” says Bowers.


   

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