US growth potential 'may be lower than thought'

Mr Sheikh is one of three portfolio managers at the JP Morgan Global Macro Opportunities Fund, which is available to local retail investors.
Mr Sheikh is one of three portfolio managers at the JP Morgan Global Macro Opportunities Fund, which is available to local retail investors.PHOTO: LIM YAOHUI FOR THE SUNDAY TIMES

Mr Talib Sheikh, managing director at the Multi-Asset Solutions team at JP Morgan Asset Management, discusses his outlook for global markets in the latest in our series featuring fund managers and leading market experts.

Mr Sheikh scans the economic landscape for trends such as the divergence in recent times of the policies of various key central banks.

For instance, the United States Federal Reserve raised interest rates off historic lows after nearly 10 years.

At the same time, the Bank of Japan has pushed rates negative and the European Central Bank also cut its deposit rate deeper into negative territory this month and raised monthly asset buys.

Thinking about how the market will factor such macroeconomic trends or themes into asset prices can help one generate returns and develop a diversified portfolio, he said. He has identified eight such themes.

Q. Could you talk about a theme you have identified?

A. There is a risk that the growth potential of the US economy is lower than what people think.

Trend growth in the US before the financial crisis was around 2.5 per cent but that has fallen since then to around 1.5 to 2 per cent.

Although unemployment in the US has fallen much faster than anybody thought, we've had in many ways a lacklustre bounce-back in output.

This could be because after the global financial crisis, companies didn't really invest for the very long term due to uncertainty on economic growth. That may have brought about limited productivity growth.

Demographics is another possible cause of this.

Q. What implications would this theme have on markets?

A. Returns from US equities are likely to be lower than they have been in the last few years. A lower economic growth potential would limit US corporate earnings.

At the moment, we also have low unemployment, which could pressure wages upwards a little bit more than expected.

Consumer discretionary firms normally have high wage costs associated with them. If a firm like Starbucks is faced with wage rises, it's likely to cause margin pressure, and be very, very negative for its earnings growth. That, coupled with lower productivity gains, could pressure corporate net profit margins.

Valuations on some consumer discretionary stocks look quite expensive. Corporate net profit margins are also at all-time highs.

As a result, we are short on US consumer staples and US consumer discretionary stocks.

Q. What is another trend you're looking at?

A. The direction that central bank policies as a whole are headed is now more uncertain, whereas from 2008 to 2014, central banks were racing to cut interest rates to zero, engage in quantitative easing and devalue their currencies.

It is also unclear if their policies will be effective and how they will impact markets.

In Japan, we saw that interest rates were cut to negative and initially the market thought that was very positive and then quickly changed its mind.

People started to consider what impact negative interest rates would have on the profitability of the banking sector.

At the end of the day, 2007-2008 was a global financial crisis and anything that damages the resilience of the global banking system, the market will take quite negatively.

We think about what policies central banks will likely implement and what implications these will have. This will affect our investment decisions.

Q. Could you give an example of an investment arrived at by considering what central bank policies might be implemented?

A. We are long on the US dollar and short on the Korean won.

Q. Why are you long on the US dollar?

A. Given the rate unemployment has fallen and the pace of job growth, we think that inflation could move higher and that the Fed may have to raise rates faster than expected.

We continue to believe that the fundamentals remain for strong consumer-led growth in the US this year, and think the Fed probably will raise interest rates two times this year, so that lends support to the dollar.

Q. Why are you short on the Korean won?

A. When we look at the South Korean data, it's relatively weak and one of the measures that the Koreans have at their disposal is to weaken their currency. We think that's something they feel disposed to do.

South Korea is a very open trade-related economy, and we see really no pick-up in the trade data across the Asian or Asean region.

We also think South Korea is very tied to the fate of the Chinese economy, where growth is slowing significantly.

The Chinese are likely to ease monetary conditions further but that will not likely succeed in propping up their economy and stimulating the South Korean economy with it.

The authorities in China have also started to allow the currency to weaken, which damages Korean competitiveness.

A version of this article appeared in the print edition of The Sunday Times on March 20, 2016, with the headline 'US growth potential 'may be lower than thought''. Print Edition | Subscribe