‘Change and renewal are themes in life, aren't they? We keep growing throughout life’ - Susan Minot
Another global quarterly corporate earnings season starts – by my reckoning my seventy-fourth in a row where i have focused primarily on individual shares – and it comes at a truly fascinating point of the global economic cycle. The last month has seen great fear – as expressed by the worst December performance of the US stock market since 1931 – but also a strong start to 2019 trading. Last week, for example, was the strongest weekly performance for the US financial sector in over seven years. Given that financial sector shares are generally regarded as a leveraged play on economic growth and confidence – after all, if depositors en masse asked for their money back, barely any bank would have the capability to pay them for weeks if not months – this was a striking shift.
Tactically the impetus behind this shift were the earnings disclosures from a bunch of leading US financial institutions. The Global Dynamic Opportunities Fund does not hold any US financial stocks – preferring the turnaround opportunities in UK-listed names such as Barclays (which recently has become the Fund’s largest position) or historically Old Mutual – and again the various disclosures in the last week about lending growth, trends in tangible book value and reserving updates left us pretty cold. However one aspect the US financial names did perform well on was shareholder distributions. For example JP Morgan – the largest US listed financial company – returned to its shareholders via either a dividend or a share buyback over 6% equivalent of its market capitalisation in the last year. That is hardly shabby – and certainly a lot better than the interest payable on almost any deposit account.
Cash flow generation and returns to shareholders are always earnings season themes that interest us in the belief that in today’s still uncertain world, progress on these fronts give management teams time and breathing space whilst for investors there is a continuing rationale to hold such a stock. Still the best justification for maintaining a large position in direct equity investments – rather than fixed income instruments or cash – are the material pick-up yields available from most global stock markets compared to these alternatives. This is particularly marked in Europe and the emerging markets but less so – due to the march upwards in US bond yields – in the United States. Hence maybe the attractions of the financial sector disclosures in the last week or so.
This upcoming week a wider array of sectors are reporting with the most striking disclosures undoubtedly coming from the industrial, consumer and technology areas. For these three important parts of the stock market, questions of recent trade angst impacts and shifts in foreign exchange rates will be much more pertinent. There is no doubt that the improvement year-to-date in global financial market sentiment has been influenced more by a better tone to bilateral trade discussions between the United States and China than anything else. Whilst key individuals from both sides hopefully look forward to their next meeting at the end of January in Washington, how the corporate world is practically on-the-ground being impacted by such fears will become apparent in the next week or two. We expect a varied response on a company-by-company basis reflecting the harsh reality that some corporates will be better prepared and more able to withstand the shifting sands of uncertainties in demand for their own products, within their supply chains or via the influence of slowing underlying growth rates. As with our Brexit and related discussion a couple of weeks ago, the opportunities for an approach that leans much more heavily than the norm on individual stock selection seems pretty clear to us currently…aided an abetted naturally by a near obsessive participation in quarter earnings season webcasts and flicking through a raft of corporate presentation documents.
As always…bring it on!
Chris Bailey, Chief Investment Officer
Daniel Stewart & Co
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