Kicking the tyres of our holdings and potential investments is integral to how we manage the Heritage fund. I therefore spent a week in the US, visiting such companies. My last trip was a week before the US election, so it seemed the perfect time to ascertain what, if anything, had changed.
I travelled from Florida and Georgia to Illinois, to visit 20 companies. So what was it like on the ground in President Trump’s new America? I returned with several strong impressions.
The bullishness was at odds to what I was expecting. During my last trip, in November 2016, there was widespread concern about the impact of a Trump victory. Clearly, there are numerous left-field risks that could still derail the economy – the healthcare bill debacle is a case in point. Nonetheless, the economic recovery continues apace. Employment conditions are robust, and businesses are feeling more confident in their spending decisions.
Increased optimism around the sustainability of the housing market was the most surprising positive change since my last visit. We forget that US housing starts are still below their long-term average of 1.5 million per year, and there’s little excess inventory nationwide. Unemployment is below 5 per cent and consumers are, in many cases, feeling more secure in their jobs. It’s also easy to paint the US housing market as homogenous. The reality is different – it’s a collection of regional markets, many of which are performing well.
In Atlanta, I met one of the leading home improvement retailers and heard about the sustained recovery in spending on renovation and refurbishment on homes. Time spent at one of the largest carpet factories in the US was also insightful: demand remains robust, as consumers feel more positive buying those big ticket items.
Several of the more industrial companies spoke of their increased confidence around the manufacturing cycle, and not only those in line to gain from ‘Trumponomics’.
Interestingly, senior management teams said the Trump administration was far more open to dialogue than the previous administration. This has had a tangible impact on how these businesses view capital allocation. They expect to hire and spend more on new plant and equipment. They also highlighted that much of their end-market demand is domestic (over 80 per cent in some cases), rendering them less worried about issues such as the infamous wall with Mexico. I also discussed corporate tax reform with several companies and while many are anticipating some kind of change in the next 12 months, none of them is banking on it. These businesses appear bullish about the US economy itself, rather than on any hand-outs from the government.
This optimism flows through to the everyday, too. We own Coca-Cola because we think structural changes at the company – re-franchising and tilting towards a more balanced beverage portfolio – will drive returns. During my visit, management provided plenty of colour on the US business, where consumer demand remains strong, albeit with ever-changing tastes.
We are always mindful of the price we pay for an investment and seek to maintain our valuation discipline at all points in the cycle. I saw several great businesses in the US with durable economic moats, strong management teams and a helpful macroeconomic environment. But valuations have become more challenging. We are happy to wait for the appropriate entry price in the right names.
David Harrison is portfolio manager of the Rathbone Heritage fund