Artemis: US Equities Cheap Compared to Bonds

The US economic outlook is rosy, says veteran US equity fund manager Cormac Weldon, and this supports the American stock market

Emma Wall 19 May, 2015 | 12:43AM
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The Swiss National Bank – which is issuing bonds with a negative interest rate, is buying up US equities. A fifth of the SNB’s total assets are held in overseas stocks; with $37 billion in 2,548 US companies.  In particular the Bank likes Apple (AAPL), having bought an incredible 3.4 million shares in the first three months of this year.

Federal Reserve chief Janet Yellen may consider US equities “fully valued”, but clearly overseas investors have other ideas.

“US equities are cheap compared to extremely expensive bonds,” said Artemis US Equity fund manager Cormac Weldon at the Morningstar Investment Conference last week.

“The fact that the Swiss National Bank is buying up Apple just goes to show that US stocks are relatively attractive.”

There are negatives of course, Weldon concedes. The sharp increase in the value of the dollar in the first quarter of this year makes exporters look less attractive to the rest of the world. Energy companies’ capital expenditure will be significantly less this year compared to last thanks to the price of oil halving. This will mean less exploration, and potentially a drop in future revenues.

Then there is the freak weather event to consider, which resulted in GDP growth for the first quarter of the year falling to just 0.2%, down from predictions of 1%. The harsh winter weather in the first three months of 2015 stalled economic growth – a déjà vu to a year earlier when a “one off” weather event caused the US to go into recession for the first quarter of 2014.

But Weldon remains positive. He points to wage growth, predictions of an economic bounce back and signs that the housing market is picking up.

“The housing market is a great barometer of economic health. The housing market in the US has been slow to recover as new mortgage regulation has made it difficult for people to buy,” he said.

“But now employment is back to pre-recession levels and we are starting to see healthy wage growth, we expect this will lead to the saving of deposits and house buying.”

More money in the US consumer’s pocket means that domestically focused stocks should do well. Weldon has bought up computer gaming stock Electronic Arts (EA) as it fits the profile of equities with topline growth that he likes, but ignoring bond-proxies financials and utility stocks.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar