Portfolio

Expect good returns for US equities

George Russell, Institutional Portfolio Manager, Franklin Templeton group

There’s a lot of pent-up demand and ability to spend in the US, says the Institutional Portfolio Manager, Franklin Templeton group





People’s loan repayments as a percentage of their income are much lower now, says George Russell, who is a fund manager for the Franklin Equity Group. He expects demand for auto, housing and an energy boom to help US economic growth.

US companies are sitting on a lot of cash and jobs data seems encouraging. Are we truly seeing a recovery?

We think there will be continued moderate but positive economic growth in the US. There are a lot of reasons to think that economic growth is going to continue. Many factors that led the market higher in 2013 are still in place this year, which should lead to overall good returns for US equities. We see decent corporate profit growth overall, we see very strong balance sheets on the corporate side, a lot of ability for companies to use cash. The employment picture is getting better. If you look at the interest rate and inflation picture, both are low.

You have said consumption is rising. But IT companies here say retail sales in the holiday season weren’t good enough.

It’s not robust, yes, but it is higher. The consumer is in a much better situation than a couple of years ago. In the last couple of months, retail sales were a bit lower than in the previous months but the trend is definitely on the upside.

We’ve been in record territory in terms of retail sales adjusted for inflation, and so we are now significantly into higher territory in terms of overall retail sales. Also, individual’s debt service payments as a percentage of monthly income now stand under 10 per cent, from 13 per cent during the real estate bubble period a few years ago.

This shows you that a significant amount of de-leveraging has taken place. Wages are getting a little better, if not robust. There is a lot of pent-up demand and a lot of ability of consumers to spend. We are also more bullish on autos and housing.

Will this be affected by the Federal Reserve’s tapering? If interest rates rise in 2015, will demand slow down?

We expect continued growth in auto sales and in the housing markets. When we say we are bullish, we say this growth is going to be additive to economic growth over a two-to-four-year timeframe. It is not going to be a jump. Interest rates are going to stay low for an extended period of time. That may not be zero for five years or so, but it will still be low for a number of years.

It will be on a competitive situation at the lower end of the curve and at the longer end of the curve, it will still generally be low and accommodative.

Over the longer term, rates will slowly start to back up, as the economy improves. But we think that generally, interest rates and inflation will still be accommodative for a longer period of time and still allow for sustainable growth in some of these areas.

Besides auto and housing helping growth, we are seeing an energy boom. Our energy costs are significantly lower than most of the developed countries due to the advantage on natural gas production in the US. So consumers are really benefiting from lower energy costs vis-à-vis some of the other countries. There is pent-up demand in the economy on the capital goods, energy and infrastructure sides. We would like to give more exposure in the portfolio, for example, to companies that are leveraged to own gas infrastructure. You can get a lot of opportunities for continued growth here.

What are your expectations on growth across the globe?

The companies that we have in our portfolio do have international exposure. But we don’t forecast global GDP or growth prospects of specific countries.

What I would say is that the US is, in general, structurally advantaged than the other developed markets. We are very bullish on a continuation of the natural gas and energy boom that is taking place; and then we look at innovation, demographics and the less rigid employment markets here than a lot of European and other developed markets. The US has significant scope to provide better growth opportunities.

Published on April 20, 2014

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