KUALA LUMPUR: There are no signs that the economic cycle in the United States is turning or that a recession is on the horizon.
The current US expansion has been long by historical standards, but investors should remember that it has been modest and slow compared with past growth periods, according to Franklin Equity Group vice-president Grant Bowers.
It is on this note, that the Franklin Group has a bright outlook for high-quality US companies that can adapt to the new digital landscape and deliver consistent, sustainable growth in an increasingly volatile world.”
Fundamentals-wise, Bowers felt that a strong labour market and rising wages would suggest that consumers have purchasing power to drive the US economy forward.
Additionally, the slow pace of growth has not led to the speculative excesses in the financial markets that typically reveal themselves in late stages of economic expansions.
“Looking at the recent economic data, we do not anticipate systemic deterioration in the macroeconomic backdrop nor broad-based weakness in corporate fundamentals in the foreseeable future, ” said Bowers.
Thus, in the low and slow economic growth environment that Franklin Group expects to continue, the companies with “idiosyncratic growth drivers” should outperform, in its view.
This favoured companies that could grow revenues and earnings by addressing secular changes and embracing disruption driven by digital transformation.
“Our focus is on high-quality companies across all industries – from technology to consumer goods to industrials – that are leveraging innovation and the power of digital transformation to change the way we communicate, shop, travel and live our lives, ” said Bowers.
Several exciting themes included artificial intelligence and machine learning, cloud computing, cybersecurity, digital payments and financial technology.
These are key investment themes the Franklin Group has identified, that it believed would be more relevant 10 years from now.
There are also risks and opportunities.
Bowers said that tariffs and trade restrictions would probably be the biggest area of uncertainty in financial markets in the near term.
Furthermore in 2020, the US presidential election cycle will dominate the headlines.
Each of the factors has the ability to impact global trade and the US regulatory environment materially – for good or bad.
“Each is likely to induce market volatility, in our estimation. Meanwhile, inflation risk has become a more distant concern as the disinflationary power of technology adoption appears to have kept broad-based inflation in check.
“US employment has been strong, and we have been seeing wages pick up and prices rising, although modestly, ” said Bowers.
While this is a positive backdrop for consumer spending in the United States, if inflation were to increase significantly, it would be a warning sign for economic growth as the US Federal Reserve would likely feel compelled to raise interest rates.
“Regardless, to achieve our investment goal of capital appreciation, we generally look beyond short-term, transitory market conditions or political risks and focus on a company’s long-term competitive position and growth potential.”
As active managers, Bowers said the Franklin Group would monitor market risks, but would keep its investment focus on innovative companies with dynamic business models that it believes can do well regardless of macro conditions.
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