JOHCM’s Rivers: Why a US recession in 2019/20 is unlikely

JOHCM’s Rivers: Why a US recession in 2019/20 is unlikely

JO Hambro Capital Management’s Vincent Rivers explains why Donald Trump’s policies may help the US economy continue to grow despite concerns over a recession.

Post By Jonathan Jones

By Jonathan Jones,
Senior reporter, FE Trustnet

Tax cuts and deregulation mean that president Donald Trump has avoided a recession over the next two years, according to JO Hambro Capital Management’s Vincent Rivers, although growth this year may be slower than expected.

Since becoming US president in January 2017, Trump has alienated some investors despite the market performing strongly, with the S&P 500 returning 25.55 per cent since his inauguration.

“In terms of Trump what we try and focus our clients on is the difference between the rhetoric and the reality,” said Rivers, who manages the JOHCM US Small Mid Cap Equity fund.

Performance of index since Trump inauguration

 

Source: FE Analytics

“On the economic side he has actually been a very constructive and very pro-business president,” he added, noting that there are two key pillars to the success of the economy and, therefore, the market – tax cuts and deregulation.

Starting with taxes, the market rose sharply in the fourth quarter of last year as corporation tax was chopped down by almost one-third, from 35 per cent to 21 per cent.

This should in theory lead to an increase in investment, as companies have more cash coming through the balance sheet.

“That is a very pro-business-type ideology and I think it will result in greater investment but I think what the market really misses is that this is not a 2018 event,” the manager said.


“What I mean by that is by the time the law passed, which was the fourth quarter of last year, most corporate budgets were already set so while there is some fudge-ability as to what companies can do this year, the true impact is probably not going to be felt until next year.”

Turning to regulation, the manager said that the proposal to cut the number of regulatory hurdles in the system should also be a boost for investment.

Back in 1960, there were 20,000 pieces of legislation, compared to today where we have 185,000. Indeed, during the Barack Obama administration roughly 600 regulations – or roughly one per week – were passed.

“That is a lot and I am not one of these whacko guys that has no regulation – I think what you‘re trying to get to is smart regulation,” Rivers (pictured) said. 

“If I want to build a facility or do an investment or something like that I better make sure I am not throwing stuff in the river but do I have to go through six agencies to make the same request over and over again at federal and state level?”

While in the first part of the Obama administration there was a lot of financial risk in the fallout of the global financial crisis, Rivers noted that in the second half this abated and companies should have started investing, but were put off by constantly changing regulations.

“CEOs were ready to invest but – and that but was huge – they were afraid they would get started and the administration was going to change the rules,” he said.

With the change of government however has come a change in sentiment, with Trump looking to scrap regulations to free-up businesses to invest.

The JOHCM US Small Mid Cap Equity manager noted: “Trump comes in, very pro-business, and one of the first things he does is say that for every new regulation you pass you have to take two off the books. It is kind of childish in a Trumpian way but it is effective.”

The example the manager gave is that of a CEO with 100 potential projects on his desk. The top quartile represent the highest-returning, the most strategic or those that for compliance issues simply need to be done.

Since these changes to regulation and tax, companies are now looking towards the second-quartile projects and are approving some of these as well.

“Now you have the potential to increase your investments whereas under the prior administration you might have thought about it but you were hesitant to make the investment,” he said.

However, he said that while this all sounds bullish for the future, it is unlikely to come into effect this year, meaning that the market may travel sideways until 2019.

“I think the issue you run into in 2018 is that there are so many projects to do that companies are going to look to do larger projects and that actually causes a short-term blip in spending,” he said.

“We will go from these short-term, stop-gap projects to a two-to-three-year long-term project.”

Therefore, while he said that many in Europe are concerned over the potential for a US recession in 2019 or 2020, with increased investment on the way the likelihood of this has reduced.

One area that might be a concern for some is the proposed tariffs on companies looking to move outside of the US, although he said that not many will choose to do so with the president so vocal on the issue via his Twitter account.

Taking the recent Harley Davidson case as an example, where the motorbike manufacturer has moved some its manufacturing to Europe.


While Trump has said he will enforce tariffs on the company, Rivers said it should still benefit if the economy is performing well.

“If the news is positive for America and the economy is stronger – Harley sells a heck of a lot of bikes in the US. We all get caught up with looking at it through one lens. Harley is going to do pretty darn well if the economy is doing well,” he said.

However, while large-cap stocks may perform well, the more domestic stocks will benefit more from these changes, he argued.

“In an era where GDP growth is solid, inflation is starting to pick up and where investment should increase, small-cap stocks should do very well,” the manager explained.

 

Rivers manages the JOHCM US Small Mid Cap Equity fund alongside Arun Daniel and Thorsten Becker.

Since its launch in 2014, the fund has returned 89.5 per cent in sterling terms, beating the IA North America sector and Russell 2500 index respectively, as the below chart shows.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

Currently, the portfolio is focused on telecoms, technology and healthcare with underweights to real estate, utilities and energy.

JOHCM US Small Mid Cap Equity has a clean ongoing charges figure (OCF) of 1.02 per cent.

Add your comments

Theo

In the last figure, the curves for the fund and the index are twisted around each other like the strands of a rope. Any mathematical analysis with calculation of standard errors etc. will find there is no real difference between I call such funds closet trackers, what do you call them?

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