“From a historic point of view, valuations are in the middle of the range that you have tended to pay – they are not ‘out there’ expensive, but in terms of cash flow multiples they are not cheap,” he said.
“It is a time to be extra cautious. When interest rates go up equity markets tend to struggle, but there are parts of the market that will be fine as long as they have top-line growth.”
Edelsten’s holdings in Google, Amazon and VF Corporation are representative of a positive consumption view – with 50.5% and 20.2% invested in North America and consumer discretionary, respectively – that he justifies by pointing out the differences between US and UK economic metrics.
“Where people get hit by interest rate rises is on their mortgages,” he expanded. “But if you look at overall consumer expenditure, the shape of our economies is quite different from the way it used to be.
“While in the UK people are left to get preyed upon by the banks, in the US the bulk of people get 30-year fixed-rate mortgages from the Fed. Two years ago when interest rates were really low, everyone in America re-fixed their mortgages, so a rate rise will not affect the consumer that much. Additionally, Americans spend a huge amount of their disposable income on fuel, so they are benefitting from the low oil price.”
But it is in the 25.4% healthcare sector weighting where Edelsten is putting his faith, with Fresenius Medical Care, Boston Scientific, Walgreen and AmerisourceBergen all in his top 10 holdings and combined account for 7.8% of his 65 stock portfolio.
“In the US people do defer operations when they are poorer, but apart from that it is one of the least cyclical industries in the world and almost all of the companies have strong balance sheets,” he said.
“Even if the US economy slows down, while we would see some earnings growth downgrades, it would not be multiplied up by financially stretched balance sheets. There is very little leverage in most of these stocks, and none of them should be too affected – they may not make investors that much richer, but the risks faced as we go into tapering are modest.”
