Ritu Vohora – Investment Director July 2018 Market summary · and consumer discretionary sectors...
Transcript of Ritu Vohora – Investment Director July 2018 Market summary · and consumer discretionary sectors...
Market summary
Market data
Currencies: percentage change over month and YTD (Majors vs GBP)
Style update: what’s in vogue?
Total returns in GBP.
GBP Version
Regional performance – Global sector performance –
Equities market perspectiveRitu Vohora – Investment Director
FOR INVESTMENT PROFESSIONALS ONLY
The value of investments, and the income from them, will fall as well as rise and you may not get back the original amount you invested. Where any performance is mentioned, please note that past performance is not a guide to future performance.
Total returns (%)
MSCI AC World FTSE All-Share S&P 500 MSCI Europe MSCI Asia Pac x Jap MSCI EM
May YTD May YTD May YTD May YTD May YTD May YTD
GBP 0.3 2.3 -0.2 1.7 1.4 5.2 0.1 -0.3 -2.9 -1.7 -3.3 -4.2
EUR -0.5 2.7 -1.0 2.0 0.6 5.6 -0.7 0.1 -3.7 -1.3 -4.1 -3.8
USD -0.5 -0.1 -1.0 -0.8 0.6 2.7 -0.6 -2.7 -3.7 -4.1 -4.1 -6.5
Valuation (P/B) 2.3x 1.8x 3.3x 1.8x 1.7x 1.6x
(P/E) 17.2x 12.9x 21.1x 15.1x 13.5x 13.2x
(P/E FY1) 15.3x 13.9x 17.2x 14.2x 12.9x 11.8x
Source: Macquarie, as at 30 June 2018. Long minus short portfolio – ex-financials (market cap weighted).
Earnings yield
-8%
-10%
-6%
2%
0%
-2%
-4%
4%
6%
10%
8%Value (B/P) ROE ROIC Risk (Beta) Momentum
US Europe Japan Emerging Markets
Far East ex. Japan
Global UK
Source: Datastream, MSCI indices, S&P indices for the US, as at 30 June 2018.
June 2018 June 2018
Global equities: Increasing worries about trade caused market weakness in June, with trade wars likely to remain a headwind in the months ahead. The US was the best-performing region, while emerging markets and Asian equities trailed behind. Defensive sectors including healthcare, consumer staples and utilities dominated performance; cyclical sectors lagged. Style performance was more mixed, with risk underperforming across all regions. UK: The FTSE 100 has had a rollercoaster ride, but ended June almost exactly where it started in January. Share price rises among miners and banks failed to offset losses experienced earlier in the month following jitters over a global trade war. The Bank of England kept interest rates on hold on the back of concerns around growth and Brexit.
Europe: Trade concerns hit sentiment, and autos suffered on fears of tariffs. An immigration deal helped improve sentiment at month-end. US: A strong US economy saw the Fed raise rates in June. US growth leadership relative to the rest of the world has seen US equities outpace other markets.EM/Asia ex Japan: Dollar strength and an escalation in trade tensions continued to weigh on the region. Weaker-than-expected manufacturing data in June added to concern that China’s growth is softening.Other: Oil prices resumed their upward trend, supported by a favourable OPEC outcome and lower inventories. Gold failed to live up to its traditional safe-haven status, with the strength of the US dollar and concerns about the health of China’s economy driving it lower.
Source: Datastream, 30 June 2018.
July 2018
Asia Pacific ex. Japan
Global
JapanEmerging MarketsUK
EuropeUS
1.4%0.3% 0.1%
-0.2%
-1.7%-2.9% -3.3%
1.4%
3.0%2.2% 2.0% 1.6% 1.5% 1.4% 1.0%
-0.3%-1.0%
-1.6%-2.1%U
tiliti
es
Indu
stria
ls
Cons
umer
stap
les
Tele
com
s
Mat
eria
ls
Tech
nolo
gy
Hea
lthca
re
Fina
ncia
ls
Real
est
ate
Cons
umer
disc
retio
nary
Ener
gy
Aus. Dollar
Yen
Swiss franc
Euro
US Dollar
June -1.6% -1.4% -0.2% 0.8% 0.8%
YTD -3.5% 3.0% 0.4% -0.5% 2.3%
GBP Version Theme of the month: World Cup 2018 – who will win the Golden Boot?
Sector contribution to MSCI US 2018e EPS growth
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Utilitie
s
Energy
Teleco
ms
Healthca
re
Industr
ials
Cons. Disc
.
Materials
Cons. Staples
MSCI US 2018 EPS
Real Esta
te
Financia
lsTe
ch
5.5%
5.5%
3.5%2.1%
1.9%2.1% 0.9% 0.9% 0.3% 0.2% -0.3% 22.6%
Source: JP Morgan, IBES, June 2018
Sector contribution to earnings growth
The World Cup so far has delivered many surprises. First, Italy failed to qualify. Then, the powerhouses of Germany, Argentina, Portugal and Spain have all made shock exits. It’s fair to say that it hasn’t panned out like many of us expected. This year has also seen surprises in the equity markets, with defensive segments, in particular bond proxies, declining during market sell-offs and being more sensitive, rather than defensive. This has been fueled by fears of their vulnerability to rising inflation and interest rate changes, rather than concerns about growth.
Football requires a strong, diverse team of players, who work in an agile way to score goals and defend territory. A few exceptional players can decide a game by themselves. But the road to the final is long, and as we have seen in the tournament so far, probabilities are far from ‘certainties’. Just like a football game, no one can predict what will happen in stockmarkets; there will always be upsets and shocks. Success often comes to those who prepare and have a diversified portfolio – both in attack and in defense.
Up until June, defensive bond proxies had been sold off indiscriminately, as a rise in bond yields made them less attractive to income-seeking
investors. Utilities, real estate, staples and telecoms all have had a negative relationship
with interest rate moves over the past five years, while energy, materials, financials and technology have positive exposure to rates. More recently, defensive sectors received a boost as risk aversion set in, this time with concerns over global growth exacerbated by escalating trade rhetoric. However, underperformance could re-emerge as rising inflationary pressures push yields higher again. Defensives are also seeing poor earnings trends, and many are facing structural headwinds.
Companies with a high debt burden in an environment of rising rates could struggle to absorb higher interest costs. Telecoms look most vulnerable, with a double whammy of sensitivity to rising yields and large amounts of debt. Perhaps one for the bench, alongside utilities.
Healthcare companies have solid balance sheets, offer attractive dividend yields and should help provide a defensive buffer on the pitch. Consumer staples have lagged this year and are vulnerable to rising competition and margin pressure. Firms that have pricing power in a rising inflation environment will be more resilient. Bridging the gap between the defense and the match-winners upfront, the mid-fielders of materials and consumer discretionary sectors provide some selective opportunities.
As we move from the group stages of the World Cup to knock-out games, diversification can help spread risk against a more uncertain background. At this late stage of the cycle, stock selection becomes even more important. Let’s hope it doesn’t go to penalties!
Financials and energy are seeing the best earnings growth, but sector contributions are more balanced than in 2017. Within bond proxies, look for robust, long-term winners, with genuine growth prospects, that can withstand a bumpier ride.
Key points
• FIFA World Cup fever has captivated the globe; so far, the tournament has been both riveting and full of surprises
• In stockmarkets, bond proxies have been acting more sensitive than defensive, due to fears they are vulnerable to rising rates
• Success often comes to those who prepare and have a diversified portfolio – both in attack and in defense
Correlation of interest rates and stock prices by sectorMedian Min/Max
-1.0
-0.5
0.0
0.5
1.0
Con. Disc
.
Con. Staples
Energy
Financia
ls
Healthca
re
Industr
ialTe
ch
Materials
Real Esta
te
Teleco
ms
Utilitie
s
Source: State Street Global Advisors, Factset, USD, 2018. Averaged over 5 years.
Sector correlation to rising interest rates
Where any performance is mentioned, please note that past performance is not a guide to future performance
More balanced than in 2017
Providing the goal-scoring potential is a trio of classy strikers. Technology stocks have been superb strikers, with shares rising alongside higher earnings – the key driver of outperformance. While there are some expensive mega-stars, there are many attractively valued players that can deliver sustainable earnings growth over the long term. Financials have been volatile of late, but balance sheets look solid. The sector will benefit from rising interest rates as net interest margins improve, supporting profits. The energy sector also provides an advantage: it’s cheap versus its own history and relative to the broader market. Firms have strong earnings and are seeing significant free cashflow, having taken out lots of costs.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. JUL 18 / 296508_315009