GLOBAL EQUITY PERSPECTIVES 14 AUGUST 2017

Transcription

1 GLOBAL EQUITY PERSPECTIVES 14 AUGUST 2017 Endurance is patience concentrated. 1. US ECONOMY Thomas Carlyle We commented on the Conference Board s leading economic index in our previous note. We now also have the updated Philadelphia Federal State s US leading index. Federal Reserve Bank of Philadelphia US Leading Index vs S&P 500 This leading index also has a good record in foreseeing an upcoming US recession. Whilst its recession threshold is at a level of zero, it has historically warned of an S&P 500 peak at a 0.9 reading. Its current value is at a reading of 1.4, above its long-term average of 1.3, and over 50% above the warning level for the S&P 500 peak. Federal Reserve Bank of Philadelphia US Business Outlook Index vs S&P 500 Their business outlook index also appears constructive. We illustrate in the above chart the index s historic values at the timing of the S&P 500 structural peak levels. The index is currently more than twice those levels (the horizontal line) with no recession in immediate sight.

2 2. COMPANY RESULTS The results season is almost done, with the overall result encouraging (S&P 500 EPS +10%, top-line +5%). It is worth considering the revised outlook on this front. S&P 500 Trailing and Forward Earnings per Share ($) Source: Bloomberg & Stonehage Fleming Investment Management Limited. August Earnings have dropped through 2015 and 2016, lagging the expectations analysts had a year prior. The current good earnings season has brought relief, and earnings have now totally closed the gap with expectations a year ago. This in itself is clearly constructive. S&P 500 Earnings per Share 12-month Expectations vs US Dollar Source: Bloomberg & Stonehage Fleming Investment Management Limited. August As reflected in the above chart, the strong Dollar detracted from the S&P 500 earnings over the past two years. The opposite is now in process - the Dollar has weakened by about 5% this year thus far, and earnings expectations are being revised upwards. Whilst expectations traditionally slip early in the year after the December year end results, this happened only very modestly this year initially, with a positive trend currently. The current 12-month growth expectation is +11%, the first double digit expectation in a long time. Accelerating earnings growth is usually positive for equity performance, and even more so after a prolonged period of stagnation (as we ve seen over the past two years). President Trump got a weaker Dollar he wished for, and business on the economic front seems to stay its constructive course. 2

3 3. WORDS OF WAR The threats of action against North Korea and Venezuela are causing unease and nervousness in the markets. This reflects in the following chart of S&P volatility: S&P 500 Investable VIX Index vs Speculative Contracts and S&P 500 The VIX index increased by more than a third off a very low base. Whilst there were a large number net short contracts (as the case often is at low levels of volatility), further net short contracts were taken up. There are now a five-year record number of net short contracts. Interestingly enough, the S&P 500 is only -1.6% off its peak, and the Dow index only -1.2% (the Nasdaq 100 is -2.0%). This does not reflect any panic yet, and may also reflect the end of the good news earnings season and the traditional weak summer quarter. The question still remains what potential effect military action may have on the markets. Nobody can answer this question with any degree of confidence at this stage. It is, though, interesting to consider the reactions with the Iraq experience: Both the S&P 500 and the MSCI World indices dropped before the invasion. Both indices also turned the corner days before the invasion, and recovered strongly afterwards. It may be that the initial stock market depreciations had more to do with the aftermath of the technology bubble and recessionary conditions, but the striking feature remains the end of the bear market as the invasion of Iraq started. The only point we can make in this complex context is that fundamental economic conditions are often the determining factor in stock market behavior. 4. CAPITAL EXPENDITURE Source: Bloomberg & Stonehage Fleming Investment Management Limited August Past performance should not be used as a guide to future performance. We may be at an interesting inflection point in overall capital expenditure by US companies. We have particular interest in this topic, mainly because we invest for future growth and businesses with the combination of good cash flow generation and opportunities to invest for further growth (instead of simply replacing capacity) have proven to outperform over time. The following two charts offer some insights in this context: 3

4 S&P 500 Capex ($bn) vs Capacity Utilisation (%) Source: Bloomberg & Stonehage Fleming Investment Management Limited. August Positive turns in capex programmes have historically followed positive turns in capacity utilisation. The latter seems to be bottoming out at the moment, with the former following suit already. S&P 500 Capacity Utilisation (%) vs Share Price Performance ($) We indicate in the above chart the positive turns in capex growth. The S&P 500 had positive performance for at least three years subsequently. Hopefully this experience can continue repeating itself. With revenues now growing better than in the past two years and continuing low inflation and interest rates, this theme may well be on course. It is our task to identify good candidates early to invest in. 5. TECHNICAL PICTURE The options market is a good indicator of overall market positioning. The S&P 500 Put/Call ratio has a good record of providing tactical buy or sell indications, as reflected in this chart. The ratio is currently close to its ten-year average, indicating no particular strong views. This does not indicate meaningful investor concerns about the current threats of military action. Source: Bloomberg & Stonehage Fleming Investment Management Limited August Past performance should not be used as a guide to future performance. 4

5 S&P 500 vs % of Stocks at 52 Week New High & New Low, and % Above 70 or Below 30 RSI Levels Both the new high/new low and above 70/below 30 RSI level measures have a good record of indicating good tactical buy or sell opportunities. The best scenario for good new buying opportunities would be if there are no new highs or no new names trading at a 70 or higher RSI level, along with high negative percentages to the new low/below 30 RSI levels. The conditions for tactical buy levels regarding the new high/above 70 RSI levels are close to being fulfilled currently, with respectively only 0.8% and 1.6% of S&P 500 stocks qualifying. Whilst the counts for the new low/below 30 RSI levels are not at extreme levels yet, both readings currently show sharp spikes to levels that have had successful calls historically. On balance, all the current readings show advanced progress to making tactical buy calls. S&P 500 Tactical Corrections with RSI Since the Credit Crisis We have had ten tactical corrections close to five percent or more since the credit crisis, on average at -10%. The RSI indicator has a good record at those times making buy calls. Its current reading is well advanced, but not yet at a level to make a strong buy call currently. 5

6 6. SCARCE LOW VALUATION Many pundits remark on high equity valuations and that quality businesses trade at exorbitant valuations. We have come across an interesting example of a sector leader trading at below its own long-term average valuation. WPP Price/Earnings and Relative Price/Earnings (vs S&P 500) and Earnings Growth (%) WPP currently trades at a -0.5 standard deviation P/E level. Its relative P/E is at its historic low levels. These ratings follow changes in earnings estimates closely. The business is not without its controversies it is often in the news about excessive executive remuneration and it had a severe cyber-attack a few months ago. Its business is very technology driven, and it seems to have been one of the worst attacks in history. Earnings expectations turned negative earlier this year. The share trades at a single digit EV/EBITDA, a 7% free cash flow yield and a 3.6% dividend yield. One will have to do a proper study of the rapidly changing advertising industry and the business to understand its strategic issues and outlook, but the share now clearly falls in the value category. Gerrit Smit Partner - Head of Equity Management Stonehage Fleming Investment Management Limited 15 Suffolk Street London, SW1Y 4HG T E gerrit.smit@stonehagefleming.com 6

7 RISK DISCLOSURE This communication has been prepared for information only and is not intended for onward distribution. It is neither an offer to sell, nor a solicitation to buy, any investments or services. This communication does not constitute a personal recommendation and does not take into account the individual financial circumstances, needs or objectives of the recipients. The advice we provide will all be based on and take into account a majority of product types and not every single equivalent product within a given product category. As such, our advice is restricted (as opposed to independent) as defined by the Financial Conduct Authority. All investments risk the loss of capital. The value of investments may go down as well as up and, you may not receive back the full value of your initial investment. Past performance should not be Changes in the rates of exchange between currencies may cause the value of investments to go up or down in the reporting currency. In general, underlying investments denominated in foreign currency are not hedged back into the reporting currency. Among the factors that may influence currency values are trade balances, the levels of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. Returns may increase or decrease as a result of currency fluctuations. Values may also be affected by developments relating to controls and restrictions on foreign currency remittance of proceeds of investments in a non-sterling jurisdiction. Whilst every effort is made to ensure that the information provided to clients is accurate and up to date, some of the information may be rendered inaccurate by changes in applicable laws and regulations. For example, the levels and bases of taxation may change. Any reference to taxation relies upon information currently in force. You should note that the bases and rates of taxation may change at any time. Tax treatment depends upon the individual circumstances of each client and may be subject to change in the future. In addition to the information provided by Stonehage Fleming Investment Management Limited you may wish to consult an independent professional. It has been approved for distribution in South Africa and those countries of the EEA where distribution is permitted by: Stonehage Fleming Investment Management Limited 15 Suffolk Street London SW1Y 4HG Stonehage Fleming Investment Management Limited is authorised and regulated by the Financial Conduct Authority and registered with the Financial Services Board (South Africa) as a Financial Services Provider ( FSP ) under the Financial Advisory and Intermediary Services Act, No 37 of 2002 (FSP No: 46194). 7