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Weldon and Moore (Artemis) on US economy, FED and the upcoming presidential elections

Fund managers Cormac Weldon and Stephen Moore run the Artemis US Select Fund and Artemis US Extended Alpha Fund respectively. The Artemis US Select Fund is a concentrated, ‘best ideas’ fund that follows a high-conviction approach. In this column they share their views on the US economy, the FED policy rate decisions and the upcoming presidential elections.

as received from Giuliana Patrone, Senior Account Executive of Positive Alpha.

The seven-strong Artemis US equity team has a highly regarded long-term record. Their investment approach combines bottom-up analysis with top-down insight. With US elections looming and interest rates expected to rise, fund managers Cormac Weldon and Stephen Moore give their outlook and explain how their funds are positioned.

Did the Brexit vote have any impact on the US?

One of the most visible impacts of the Brexit vote has been on the currency market. The depreciation of sterling versus the US dollar will result in lower reported profits for US companies who sell goods and services in the UK. That said, US companies have been adjusting to a strong dollar and weaker growth in Europe for a number of years. Over the longer term, the more lasting impact will come through changes in economic growth in the UK – but also perhaps in Europe. It is our view that the Brexit vote puts the European project under further pressure.

Are you worried about higher interest rates?

Considering the continuing expansionary monetary policies in Europe, Japan and China, we consider it unlikely that the US is about to embark on a long period of raising rates. In fact, the market has at times toyed with the possibility that interest rates might need to be lowered. Underlying this question is the problem of indebtedness, which has grown significantly throughout the global economy in recent years. Because the dollar is the world’s reserve currency, any increase in the cost of financing in dollar terms can lead to a worsening of the position of debtors on a global scale. This will complicate the Fed’s task in continuing the process of raising rates that it began last December.

How might the approaching US presidential elections have an impact on the market?

This is a more uncertain election cycle then we have had for some time. Donald Trump’s isolationist rhetoric is negative for America’s global companies. If globalisation were to be reversed and if those companies who manufacture abroad and sell products in the US were to be penalised, that would be particularly negative for technology and industrial companies. As for Hillary Clinton, we believe the impact on markets were she to win would not be as negative as a victory for Mr Trump. Overall, she has been a relatively ‘centrist’ politician. That said, the battle with Bernie Sanders for the Democratic nomination did pull her to the left of centre on issues such as healthcare and the financial reform. So those two sectors are likely to be somewhat negatively impacted by her victory.

We take some comfort from that fact that while it is possible that one or other party could gain control of all three branches of the government, it is not likely. The ‘checks and balances’ in the US political system mean that the results of the elections for Congress will be as important as the presidential election. Any outcome in which power is divided between the Republicans and Democrats will require cooperation to pass legislation.

This election is one of the few in American history that may have a marked, long-term effect on the stockmarket. The situation is also slightly unusual in that both candidates are ‘anti trade’. Clearly, this is a source of concern. Clinton and Trump both intend to address healthcare costs, which are far higher than in Europe. This will likely have consequences for healthcare stocks. Another issue to take into consideration is that spending on defence is increasing worldwide, but particularly in the United States. To us, the crucial point is that no matter which candidate prevails, there is likely to be a significant increase in spending on infrastructure and defence.

In which sectors do you find the most attractive opportunities?

The cable companies are interesting area. They are in effect, oligopolies in their domestic market. So their pricing power is strong. And in the case of Charter Communications, its recent acquisition of Time Warner Cable has improved its bargaining position relative to programme makers, which should help keep costs in check. Amid the brouhaha of the election campaign, these companies will continue to go – profitably – about their business.

Apple is one of the largest positions in the Artemis US Extended Alpha Fund. What do you like about it?

When we bought a long position in Apple earlier this year, it was in the belief that slower sales of the iPhone 6s were being reflected in the share price and that the upcoming iPhone 7 would spur a modest growth cycle for Apple. We also believed that a more significant iPhone upgrade cycle would be coming in 2017 with the release of an entirely new form factor, a year earlier than Apple’s normal two-year cadence. We believe that the balance between the potential gains and downside risk – a metric we call the ‘up/down’ – is still attractive. So, although we bought Apple too soon, we retain our position.

How are the funds positioned?

In our long-only funds, our largest holdings span a number of sectors. They include Home Depot (which is benefiting from an improving housing market). Within healthcare we own Zoetis (which supplies pharmaceutical and health products for pets and livestock) and United Healthcare, the largest healthcare insurance company in the US. Within industrials we own Norfolk Southern Railway which is benefiting from improved industrial trends in the US. In technology, we own Skyworks Solutions, which provides components for smartphones.

In the US Extended Alpha Fund, we are a little bit more cautious on valuations and, of course, have the flexibility to take short positions. We have some concerns about the financial sector. Investing with the expectation of the ‘normalisation’ of banking would be misguided: it is hard to see any immediate change in conditions that would trigger positive surprises in the bank’s profits. On the long side, technology still looks interesting. Although there are fewer opportunities than previously, we still find interesting companies producing stable cashflows to invest in.



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