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California-based George Russell, institutional portfolio manager, Franklin Equity Group, tells Puneet Wadhwa the US economy is on a stable footing and should do well. Corporate profits for S&P-listed companies are nearing records and the worst could be behind. Excerpts:
Is the recovery in the US stable enough for the Fed to raise rates? What is the situation?
From a macroeconomic perspective, we are quite optimistic things are moving in the right direction. If we look at growth, the last few years were filled with fiscal headwinds. Issues like a rise in taxes, with sequester cuts and the government shutdown, impacted overall growth in the US. If we look at the last few quarters and remove some politically-related fiscal issues, the private economy has been doing reasonably well and has the opportunity to do better. Now some uncertainties linked to government budgets, sequester cuts and spending are out of the way. We should see significant tailwinds for the US economy.
What about corporate profitability and the road ahead for US-based companies? Is the worst over?
Corporate profits for S&P-listed companies are nearing records. Factors such as higher productivity rates and low input costs have been contributing to an environment of slow-but-steady growth, reflected in the earnings growth of many US companies.
Importantly, though market levels are generally higher, valuations have remained reasonable, relative to their future growth potential. With positive underlying fundamental support, they continue to have room to potentially move higher over the next few years.
Companies have $2-trillion in cash. This can be used to pay dividends or fund growth. Overall, we see the general macro theme for the US as one of moderate growth, with a potential to do well.
So, the tapering is par for the course? Because raising interest rates that early did spook markets and surprised most analysts.
From the Fed's side, it still is an accommodative policy. Yes, the language spooked the markets as people were not expecting the Fed to raise rates that early. However, the Fed has maintained there will be no changes till the recovery is sustained. Hence, we are not worried about the Fed's stance as things stand.
How big is the geopolitical risk for the markets and economy?
Geopolitical risk is one of the bigger ones. We focus on bottom-up stock picking and have positioned our portfolio in a way it does take care of a significant increase in geopolitical risks leading to a slowdown in the world economy. Broadly, geopolitical risks are not big enough to be really concerned about a long-term impact on the US companies we are invested in.
What is your interpretation of the economic data from China and Europe and its impact for the world economy?
In regard to China, we are clearly not in agreement with the "hard landing" camp, but we do believe that there is a slowdown and have that factored into our company analysis.
On the European side, our general thought is that US companies are at an advantage since they are in better shape when compared to their European counterparts. We took a lot of the necessary pain after the recession on the corporate side and the worst now seems to be factored in.
So what sectors / themes make it to your investment list?
From our perspective, when we think of investment, it is in the US-based companies and the sectors and themes are broad-based growth themes that might not be India specific but they are globally right.
We like software and technology as a theme, especially those companies that are into cloud-based computing. We want to be away from the more legacy based premise-based vendors. On the healthcare side, are big on the biotechnology segment such as cancer drugs, multiple sclerosis (MS) drugs etc. Consumer discretionary is another sector we like.
Which ones would you stay away from?
The choice will be based more on valuation or the growth side. It is not that the sectors will show no growth, but the pace of growth will not be fast enough. Utilities and consumer staples we are under-weight on.
