‘I’m not worried about a US recession – they’ll spend their way out of it’

Two years is an eternity in politics. This is why Fran Radano, co-­manager of the North American Income investment trust, suspects that this time will be different for Donald Trump, who recently announced his intention to run for the US presidency in 2024.

The £443m North American Income trust stands out among US equity rivals with a 15pc gain over the past 12 months against an average 12pc loss. It has benefited from a shift to “value” companies, previously unloved by markets, as shares of “growth” companies have plummeted. The trust yields 3.2pc.

Mr Radano explains why he thinks American consumers should prove resilient even when faced with recession and why inflation is likely to remain high for some time to come.

How do you pick stocks?

It is an income trust, so we focus on stocks that pay dividends. We look for high-­quality companies with excellent management teams and good business models that operate in good industries.

These companies are conservatively managed, have the ability to generate cash and grow organically, and return money to shareholders in the form of a dividend. We look for growing dividend payments that are covered by a company’s earnings.

What is your outlook for the US stock market?

One of the biggest overarching themes has been the Federal Reserve’s switch from a ­decade-long near-zero interest rate policy to raising rates aggressively to combat inflation. We haven’t seen anything of this scale for some time.

When interest rates are zero and capital is readily available for any company that wants it, investors focus on a company’s growth prospects and speculation can happen.

As this capital isn’t available in the same way now, it means “hurdle rates” (the minimum acceptable rate of return on an investment) have increased, so investors need to be more discerning.

Arguably this is the biggest thing to happen over the course of a generation. This is also where a ­valuation-­sensitive investment process, like ours, can really pay off compared with the past.

Do you expect America to enter a recession?

With the Federal Reserve increasing interest rates fairly aggressively, it clearly looks like we are heading in that direction. Having said that, we are still at full employment levels.

What I mean by that is that unemployment is at 3.7pc, so anyone who wants a job can still get one. That is important because the consumer is responsible for close to 70pc of GDP in America and when the consumer has a job, he or she tends to spend. That is a pretty good underpinning for the economy.

When you factor in the payments people received from the government during the pandemic and cost savings associated with working from home, consumer finances look pretty strong.

The consumer is well positioned going into a theoretical recession, which will make it more palatable and perhaps shallower than it would have been in the past.

What were the repercussions of the midterm elections?

The Republicans gained control of the House of Representatives. This will provide a modest firewall for the most partisan legislation that Joe Biden would consider.

That said, I would expect to see classic horse-­trading. Each party should achieve a few smaller wins from their priority list at the expense of some items from the other side of the aisle.

What do you think of Donald Trump’s presidential bid?

Two years is an eternity in politics. I expect several strong opponents to emerge. I think this time will be different for him as the bar will be higher.

Do you think we have reached peak inflation?

I think we are beyond peak inflation. This doesn’t mean prices will go down, it just means they will rise less than they have in the past.

Some of the key components of inflation are rents and housing, which are high. We think they will remain high and so will wages. This will cause inflation to remain high.

Nevertheless the worst is probably behind us.

What has been your best investment?

We bought the retailer Home Depot at the height of the pandemic and benefited from a 165pc share price rise.

And your worst?

The owner of North Face, VF Corporation, is down by more than 45pc since we bought it towards the end of last year. It has really been affected by the pandemic. But we continue to hold it as it is a high-­quality company.