Portfolio Manager Jim Morrow says there’s one story investors aren’t talking about enough: the growing strength of U.S. financials. As manager of select U.S. dividend funds for Fidelity, he spoke at a recent media roundtable last week, along with his colleague John Roth, manager of the Fidelity All-cap fund. The two shared their views on trends and risks that could shape U.S. equity markets in the coming months and years.
For Morrow, U.S. financials are a largely hidden source of growth right now. As the American banking system recovers from the financial crisis, most banks he says have managed to boost their Tier 1 capital ratios and curb risky lending practices. Despite this fact, says Morrow, the U.S. Federal Reserve continues to restrain their ability to pay dividends to investors. That will end soon, he believes and when it happens “there will be a powerful dividend story coming from the U.S. banks” as those institutions finally get the chance to normalize their dividend payouts. That could have a knock-on effect through the U.S. market he says – and that could give a boost to investors.
Morrow’s biggest worry right now is inflation, which he says could cause a real correction in U.S. stock prices. Inflation will come with a material increase in interest rates he says, however the signs aren’t there. Instead Morrow sees latent capacity in the U.S. economy and flat wages – together those factors should keep inflation at bay.
For Roth’s part, he’s on the hunt for the next great growth stock – tomorrow’s Apple. Tesla has a lot of potential he notes – its disruptive business model is not only shifting how cars are made, it’s also challenging the entire business model (you can bypass the dealer model that makes buying a car the traditional way far more complicated).