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18th September, 2015

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Dan Harlow, co-manager, AXA Framlington American Growth Fund

Following the recent Federal Reserve announcement, Dan Harlow, co-manager of the Elite Rated AXA Framlington American Growth fund highlights the sectors he favours in the current low interest rate, low growth environment:

“Given recent domestic economic strength, speculation around the timing of the first interest rate hike has become a preoccupation of ‘Street’ strategists. However, yesterday's decision to leave rates on hold said more about the Federal Reserve’s view of global economic conditions and the deflationary pressures that exist than what is going on domestically. No doubt wary of the impact of a stronger dollar and wanting more evidence of how the Chinese slowdown influences both the broader international economy and the ability to hit the medium term inflation target of 2%, the Fed has bought itself more time. Whether Chair Yellen and her team can get clarity on such far-reaching issues in the near term remains to be seen. However, with the number of members on the 17 person Federal Open Market Committee (FOMC) now anticipating a first rate rise in 2016 doubling from two to four, uncertainty remains as great as ever.

“We maintain that when rates do rise, they will do so gradually and from an historically low level. This should not be a barrier to performance. Indeed we note with interest a JP Morgan Asset Management piece of research[1] that concludes rising rates are generally associated with rising stock prices, when 10-year treasury yields are under 5% (they are 2.19% today). Further research by Nomura[2] highlights that rising rates may help break down market correlations, presenting a better environment for active fund managers to generate superior value, something that, as an active manager, is always welcome.

“The extreme market movements throughout August merely serve to underline the fragile sentiment towards US equities. This has been a long-standing feature of this bull market, which has had to climb consistent ‘walls of worry’. If, as some believe, we have hit a market peak, this cycle certainly never culminated in excess euphoric buying that supposedly signals the final stage of bull markets. We maintain that this is a mid-cycle pull back and represents an opportunity for select buying.

“While weaker commodity prices are acting as a drag on corporate profits, and this is having a direct and secondary impact on the materials, energy and industrials sectors, valuations are compressing. While some areas of ‘over valuation’ do still exist in our opinion, we believe opportunities for absolute returns in good quality, more domestically focused names exist. With consumer confidence near 8-year highs, and miles driven rising as a result of lower gasoline prices, we are optimistic that O’Reilly Automotive, an auto parts retailer, will continue to prosper. Similarly, with continued confidence in the housing market recovery, we believe the upscale hardware and home furnishing on offer at Restoration Hardware stores will attract both a larger customer base and a bigger share of wallet as it continues its rapid store base expansion.

“We remain disciplined in our investment process. If, as would appear increasingly likely, we are set to remain in a low interest rate, low growth environment, there are certain attributes that we need to pay close attention to. For corporates, incremental growth will be hard to achieve unless they are able to grow market share. Similarly, in a low inflation environment, pricing power will be hard to achieve. It will only be those companies that are able to demonstrate differentiated product and service offerings that will be able to deliver revenue growth. Successful innovation will therefore be more important than ever in this environment. For that reason we remain optimistic for the prospects of mid and large-cap US companies in the sectors such as health, technology and consumer discretionary where these traits are more evident. These sectors form over 60% of the AXA Framlington American Growth fund.3.”

  1. J.P.Morgan Asset Management: Market Insights . Guide to the Markets –U.S. 3Q 2015. As of 30 June 2015.
  2. Nomura: Interest Rates & Active Management’s Outlook; Could Rising Rates Reverse the Active Outflow? J.Mezrich & Y.Ishikawa. 2nd December 2014
  3. As at 17th September 2015

Other Elite Rated AXA funds: AXA Framlington Global Technology AXA Framlington UK Select Opportunities AXA Sterling Credit Short Duration


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Dan's views are his own and do not constitute financial advice


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