By Kira Nickerson Retailers and financials will be the beneficiaries of the falling interest rate...
By Kira Nickerson
Retailers and financials will be the beneficiaries of the falling interest rate cycle, according to Christopher Lees, fund manager of the Baring American Growth Trust.
Lees said the pessimism in the US market is overdone because with falling interest rates, history suggests that the market will appreciate 15% to 20% this year.
As such he is positioning the portfolio of American Growth out of defensives and into cyclical growth stocks as the year progresses.
He said: "We have positioned the portfolio to be ahead of the market so that as the market becomes more interest rate sensitive and begins to anticipate the earnings recovery, we are well positioned."
In the last 50 years there have been 12 occasions when the S&P 500 has produced negative returns and 10 times out of those 12 were when interest rates were rising, Lees said.
On only two occasions were interest rates falling. He added: "It is a very powerful theme, therefore, and probably the major trend for markets in our minds this year. Once interest rates start falling, the market begins to lose its defensive flavour and to anticipate the earnings recovery, especially within the cyclical growth sectors."
Lees is confident the falling interest rate environment is particularly positive for financials this time around.
He said: "What may be different this time is that the Federal Reserve is lowering interest rates, yet the US financial system is in its best shape for three decades; hence our expectation that financials will be one of the best, if not the best, performing sectors this year."
Consumer cyclicals are one of the sectors which outperform when rates are falling, he said, as it is driven by the retailers. As interest rates were cut this year, retailers once again started to outperform.
Lees said: "From a top down view, we were buyers of retailers in January, we bought Wal-Mart, Bedbath and Beyond and Jones of New York. But from a bottom up perspective, we also had confidence that that was the right thing to do.
"Bedbath and Beyond is a fabulously exciting, mid-cap company showing a probable 30% earnings growth for the next three years, trading at a P/E lower than its five-year average.
"Even more exciting is Jones Apparel, another mid-cap retailer, growing its earnings at 30% for the next three years and trading at a P/E of 15, significantly lower than its five-year average, one of the best examples of growth at the right price to be seen currently.
"The top down and the bottom up certainly suggest focusing on the cyclical growth sectors,"
Lees believes the US economy is V shaped rather than the more pessimistic L or U shaped scenarios.
This belief is centred on the fact that while consumer spending is slowing it has not stopped.
Unemployment is also creeping up in the US but this needs to be put into perspective in that it is still near record lows compared to the past 50 years, Lees said.
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