With the prospect of a Federal Reserve interest rate rise hanging over us and the equity bull run well into its sixth year, the investor community is starting to wonder if the US slowdown is the first sign of a global deceleration.
But while Philbin conceded that the US Q1 figures were decidedly poor, he believes there is scope for temporarily-abated consumer spending to kick back into gear in the next quarter.
“The US economy was hurt quite a lot in Q1 by the polar vortex, which was definitely a factor in why people haven’t been spending,” he said. “But if you can’t buy something in January because of the snow, it doesn’t mean you won’t buy it, you will just defer the purchase to February or March.
“The other thing that hurt the US were the port strikes, because it meant that the inventory hasn’t been there. If the consumer has the ability to buy the product but can’t because either it has not been made yet or is not in the store, then that is a slightly different matter.
“You could argue that the Q2 numbers will be very strong relative to Q1 because of both the weather and the strikes. When that inventory gets back into the system the consumer demand will be there, though people may be more cautious with their spending.”
Philbin is fairly confident that, despite this being one of the longest equity bull runs on record, the finish line is not yet in sight. But there is, he admitted, one cause for concern.
“I totally agree with the saying ‘stock markets do not die of old age’,” he explained. “We have had six years of unprecedented stock market growth and it has been however long since we had a 10% fall-back – we are definitely in a bull-market phase, but we are towards the further end of it.
“The only thing that makes us worry is that earnings have not come through and P/E multiples have expanded, so I have been investing more cautiously than I was six months ago – instead of high-beta I have been going for a more broad-based scenario and not taking specific risks.
“I am trying to be more aware of what is going on, but on the other hand, if Q2 earnings come in and happen to be particularly strong we could have another strong rally from the market.”
So how does this translate into Philbin’s portfolio?
While the Discovery Managed Growth Fund still carries a significant US weighting at 17.81%, it is in Asia and Japan that Philbin is placing his chips, having taken 20% from his UK equity exposure before the General Election and reallocating 11% of it to his Asian and Japan investments.
The shift takes Philbin’s Japan weighting from 4.7% of the portfolio to 10.7%, while his Asian exposure more than doubled from 4% to 9.7%, a decision that he says was driven by his confidence in Narendra Modi’s reforms.
He explained: “When the oil price fell, rather than the end consumer feeling the benefit, the Indian government reduced the subsidy that they gave out. This put more money back into the hands of private companies so the government can focus on infrastructure and also, when the oil price rises again there will be less impact on the government.”
