Investors worried about a recession in the world’s largest economy within the next two years probably didn’t even notice the most recent downturn, according to Neptune Investment Management’s George Boyd-Bowman.
There has been growing talk of a US recession within the next couple of years as the one-off stimulus from president Donald Trump’s tax breaks wear off and the Federal Reserve continues to tighten monetary policy.
Volatility has increased recently as remarks from the Federal Reserve chair Jerome Powell suggested the central bank could hike rates faster than anticipated as it continues its process of ‘normalisation’.
However, Neptune US Income manager Boyd-Bowman said talk of a recession before 2021 looks far-fetched, particularly as most investors missed out on the most recent contraction in the US economy.
“A recession in 2019 is unlikely and it might not even happen in 2020,” said the manager. “We had a recession in 2016-17, it just wasn’t called one.
“The reason why we had one was that it was an industrial production-led manufacturing recession.”
As the below chart shows, the Federal Reserve’s Industrial Production index – an economic indicator measuring the real production output of manufacturing, mining, and utilities sectors – slumped in the 2016-17 period.
Performance of index over 5yrs
Source: St Louis Fed
The Neptune manager said that during the period, industrial production fell by 3 to 4 per cent, which typically signals that the US economy is in recession.
The reason many are now anticipating a recession is that it has been around 10 years since the last one, rather than because of any concerns over the strength of the economy.
“I’m not sure where the logic is in that,” said Boyd-Bowman.
The manager added that conditions in the market remain healthy, despite the recent sell-off, after strong Q3 earnings, albeit with a more negative outlook.
He warned, however, that a period of growing unemployment could see the economy slip into recession, although employment levels currently remain elevated.
“It doesn’t mean we can’t have a weak stock market, we’ve certainly had one in the last month or so, but I think there are different reasons for that,” he said.
“Clearly there are concerns that we are at the end of the cycle in the US, but I would say that we’re not quite as close to the end of the cycle as the market would have you believe.”
One of the reasons behind the recent downturn in markets has been the escalating trade dispute between Trump and Chinese counterpart Xi Jinping, which has seen trade tariffs imposed by both sides.
Top 10 US trading partners YTD (to September 2018)
Source: US Census Bureau
Boyd-Bowman said that if were asked two months ago whether trade wars were having an impact on the economy, he would probably have said no. However, the manager noted the ongoing dispute has started to spook investors and businesses alike.
“One of the biggest benefits of Trump coming in when he did was that he reignited animal spirts so that built-up capex [capital expenditure reserves] that hadn’t [been deployed] was quickly unlocked,” he said, adding Trump’s tax cuts helped give executives the confidence to invest in their businesses.
“The problem with trade wars is that they’ve gone back to sitting on the sidelines again,” the manager continued.
Yet Boyd-Bowman said that there was the potential for good news on trade to arise as Jinping and Trump meet at the G20 summit at end of November.
He added there are a number of reasons to be confident about the US market, not least the sell-off which has made some stocks look “considerably more attractive than they were one month ago”.
As an income investor, the manager said the US market continues to offer attractive yield opportunities despite the market’s reputation for lower payouts than the UK, with recent earnings results showing companies are able to pay a sustainable divided with the potential for growth.
“People have too much UK income exposure where the dividend growth outlook is not as good,” he said.
The manager noted that while the top dividend-paying companies in the UK are concentrated in sectors such as tobacco and natural resources, in the US they are spread across a broader range and include a number of ‘dividend aristocrats’, which have long-term payout track records.
“Arguably there is a more ingrained dividend culture in the US than there is here in the UK,” he added. “It’s not all about a high dividend today, it’s about what it’s going to grow into in the future.
Boyd-Bowman said the lack of a dedicated US equity income sector from the Investment Association puts Neptune US Income at a disadvantage when being compared with other IA North America funds, which are often more focused on capital growth.
Yet since joining the fund in June 2016, the £33.8m Neptune US Income fund has delivered a total return of 26.63 per cent, slightly ahead of the 26.36 per cent gain for the average IA North America peer, but behind the 27.38 per cent return for the S&P 500 benchmark.
Performance of fund vs sector & benchmark under manager
Source: FE Analytics
The fund has a yield of 2.09 per cent and an ongoing charges figure (OCF) of 0.99 per cent.
Boyd-Bowman is also manager of the £229.9m Neptune US Opportunities fund, which he took over at the end of August.