The message from the Federal Reserve is clear. Interest rates will remain high until inflation is bought under control. Both businesses and households can expect to experience economic pain. Market sentiment could hardly be worse. So, is this really the right time for me to invest in American companies that rely on the discretionary spending of consumers, via this UK stock?
Under the guidance of Bill Ackman, the managers of Pershing Square (LSE:PSH) have been actively buying shares in companies that include Lowes Companies Inc (Home Improvement), Chipotle, Domino’s Pizza and Hilton Worldwide. While the rest of us consider scaling back our restaurant visits and delaying house renovations, Mr. Ackman and his team believe there is plenty of life yet in consumer discretionary spending Stateside.
At present, the Pershing Square share price trades at a significant discount to asset value despite its impressive run over the last two months. Such performance in the face of poor economic data could reflect a belief that the US Federal Reserve will in fact be able to engineer a soft landing and consequently will be able to slow or even reduce interest rates faster than the prevailing consensus.
Time will tell. Recent comments from Jerome Powell do admittedly make that soft-landing scenario look less likely. But bearing in mind that share prices are there to reflect future earnings, not present, and that the US tends to lead the prevailing cycle, Pershing Square may prove to be fortuitous buy for me.
Mr. Ackman has enjoyed a colourful investing career and has certainly made some calls that missed rather spectacularly. Shorting the US supplement maker Herbalife is one such example. But the Pershing Square of today is a different company, no longer the aggressive hedge fund, but practitioners of the more longer-term, more sustainable principles of ‘buy and hold’ investing. This is a transition that Mr. Ackman himself is keen to stress, even stating that some of investments are in businesses where an “exit will not be required”.
Interestingly, however, he is understood to have made significant sums for the fund in the derivatives market, using more complex financial instruments that profit from the expectation of higher future inflation and interest rates. Such practices reflect those skills and behaviour of the former hedge fund manager. Considering the relatively low amount of capital involved in such trades (1.4% has been quoted), this appears to me to be an acceptable risk-to-reward strategy that has the benefit of muting the worst of the economic news.
I have not yet decided if Pershing Square deserves a place in my portfolio. I am certainly going to keep it on my watchlist and take another look at it when I feel more confident that consumer sentiment is on the rebound.
