September, 2023
The rapid rise in bond yields in the recent quarter had an impact across equity markets and happened against a backdrop of mixed macro signals. The resilient US labour market and apparent bottoming of both US manufacturing PMI as well as the global earnings cycle, all indicate that the economic growth outlook is certainly stronger than feared earlier in the year. They also point to a growing cyclical recovery in stock markets. Nevertheless, risks from the lagged, cumulative impact of Fed rate hikes remain, and elsewhere macro data has been more mixed, and we’re observing an unusually wide range in market forecasts for economic growth in 2023-24. So, while the growth outlook is certainly stronger than feared at the start of the year, visibility into 2024 remains low.
Corporate earnings reflect a similar picture. With fears of an imminent recession abating, negative revisions have slowed significantly and in fact inflected slightly positive recently. The second quarter reporting season was better than expected, with beats, both by number and magnitude, higher than normal. Forward guidance remained more cautious, driving mixed price responses, however despite this, earnings expectations for both 2023 and 2024 have edged higher. For example, EPS revisions for ‘23/’24 earnings are +0.3%/+0.6% over the last three months, which is a notable improvement from the previous negative trend of -2% to -3% per quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_Sept-2023.pdfAugust, 2023
Continued resilience in US economic data and a notable drop in inflation have together raised hopes that the US Federal Reserve (Fed) is done hiking rates and that a ‘soft landing’ for the US economy is achievable. At the same time after over two years of steady deceleration, the latest US manufacturing Purchasing Managers Index (PMI) of 47.6 appears to be recovering from trough levels historically associated with cyclical recovery. These are all encouraging signs. Nevertheless, risks from the lagged, cumulative impact of Fed rate hikes remain and elsewhere data has been more mixed. China continues to struggle with a deepening property crisis and recent growth and inflation data in Europe has also been somewhat disappointing. So, while the growth outlook is certainly stronger than feared at the start of the year, visibility into 2024 remains low.
Corporate earnings reflect a similar picture. With fears of an imminent recession abating, negative revisions have slowed significantly and in fact inflected slightly positive recently. The second quarter season was better than expected, with beats, both by number and magnitude, higher than normal. Forward guidance remained mostly cautious, driving mixed price responses, however despite this, earnings expectations for both 2023 and 2024 have edged higher. For example, EPS revisions for ‘23/’24 earnings are +0.3%/+0.4% over the last three months, which is a notable improvement from the previous negative trend of -2% to -3% per quarter. At a sector level, dispersion is relatively wide and mixed from a cyclical perspective. Materials, Energy, Real Estate and Health Care all sharply negative, while Consumer Discretionary, IT Hardware & Semiconductors and Communication services have seen positive revisions.
So far this year, leadership has rotated back to growth stocks and away from defensives sectors such as Utilities, Real Estate and Consumer Staples. A notable feature has been extremely narrow leadership breadth, with the socalled ‘magnificent seven’ group of mega-cap growth stocks, which make up ~27% of the S&P 500 market capitalisation, having delivered ~72% of the YTD return through to end August (albeit an improvement from 112% at the end of May 2023). There has also been strength in some cyclical industry groups recently including Autos, Semiconductors, Retail and Capital Goods, which have responded positively to better-than-expected growth and rising bond yields. This is a complicated and challenging backdrop for financial markets, with clear and sustained earnings leadership remaining elusive.
Activity during the month was mostly stock specific. We initiated a new position in Novo Nordisk following positive trial results and higher conviction about the long-term potential for their obesity drugs to also address other comorbidities. We also added a position in Ferrari, a high-quality luxury automobile manufacturer with limited cyclicality. Fortinet and Keysight both reported broadly in-line results, however order/billings trends and guidance for both were unexpectedly weak. Earnings recovery is uncertain and consequently we exited both positions.
Overall, the portfolio remains well-positioned in strong growth stories, combined with some flagship defensives. We have recently added to our cyclical exposure where we have established stock-specific, fundamental earnings conviction; however, the portfolio overall remains relatively less invested in cyclical stocks. The investment team is again travelling widely overseas to meet companies across different sectors and geographies as the earnings cycle continues to evolve.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_Aug-2023-v2.pdfJuly, 2023
Economic data has improved recently, with GDP expectations rising, resilient labour markets, strong consumption, inflation beginning to fall, and financial markets generally responding well to tighter financial conditions. We continue to see potential risks from the lagged, cumulative impact of Fed rate hikes, but we are also aware that some normally reliable economic indicators are already at low levels and the outlook for growth appears somewhat better than many feared at the start of the year. The US manufacturing Purchasing Manager’s Index (PMI) peaked well above 60 in 2021, and after a two-year downcycle it is now at ~46; while deep in contractionary territory this is approaching levels which have historically been associated with cyclical bottoms.
From a corporate earnings perspective, and after a similar nearly two-year period of negative revisions, there also appears to be some early signs of stabilisation. The second quarter reporting season has so far been better than expected with beats, both by number and magnitude, higher than normal. Nevertheless, generally cautious forward guidance has met with mixed price responses and muted earnings revisions. For example, consensus earnings expectations for both 2023 and 2024 have barely moved over the last three months (+0.1% respectively), although flat estimates are a marked improvement from the previous negative trend of -2% to -3% per quarter. Meanwhile, underlying sector dispersion is relatively wide. Materials and Energy have seen significant negative revisions reflecting lower commodity prices, while Consumer Discretionary, Communications and Tech Hardware are amongst the sectors with positive revisions for both years. More defensive sectors like Property, Health Care and Consumer Staples continue to slip in relative earnings strength. While there are some encouraging signs, and the negative earnings cycle is relatively mature by historical standards, our stock analysis and recent research trips suggest it’s still too early to call a sustained turn in the earnings cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_July-2023.pdfJune, 2023
Economic data has improved recently, with GDP expectations rising, resilient labour markets, inflation falling, and financial markets generally responding well to tighter financial conditions. We still see risks of a lagged, negative impact from US Federal Reserve (Fed) rate hikes, but we are also aware that some normally reliable economic indicators are already at low levels. The US manufacturing PMI peaked well above 60 in 2021, and after a twoyear downcycle it is now 46, approaching levels historically associated with cyclical bottoms.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_June-2023.pdfMay, 2023
Surprisingly good economic data, combined with better than expected first quarter earnings, saw recessionary concerns take a backseat in May; however, we continue to believe that near-term growth risks are skewed to the downside amid the lagged impact from Fed rate hikes, tightening credit conditions after the U.S.
regional banking crisis and a challenging outlook for corporate earnings. Labour markets have also remained surprisingly resilient so far, however there are some early signs of weakening and we expect inflation will carry on moderating as the impact of lower energy and commodity prices flow through, which could drive some further downgrades to earnings expectations. Consequently, we continue to believe we are close to at least a pause in Fed rate hikes, although we acknowledge that there are significant tail risks around this outlook, ranging from stickier inflation and a higher-thanexpected peak in rates, to a sharp pivot in monetary policy and an eventual cyclical recovery.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/201435214.pdfFebruary, 2023
The market outlook continues to be uncertain and volatile. Our central scenario remains a period of weaker economic growth and declining inflation, which should drive further downgrades to earnings expectations, and at least a pause in central bank rate hikes. However tail risks around this outlook remain, including stickier inflation and a higherthan-expected peak in rates. Consequently, market leadership remains unclear, with significant questions persisting around the ultimate magnitude of downside in both economic growth and corporate earnings.
Reported Earnings Per Share (EPS) in the US fourth quarter reporting season was broadly in-line with sharply lowered expectations, however concerns around the outlook for margins, and generally cautious forward guidance from management, have prompted analysts to continue lowering estimates for 2023. Global earnings consensus has fallen by - 1.8% over the last month and -3.1% over the last three months, with most sectors seeing negative revisions. Defensive sectors continue to mostly outperform, with Energy, IT Hardware and Materials experiencing the sharpest downgrades and Utilities, Financials and IT Software holding up relatively well. A full reset in the outlook for earnings continues to be one of the outstanding factors necessary to resolve new market leadership.
Overall portfolio positioning is largely unchanged, with our defensive flagship stocks remaining a key component, in combination with various specific growth stocks. Activity during the month was driven mainly by idiosyncratic factors. We chose to exit positions in Merck and Nestle, with both having performed relatively well in a difficult market environment, but where we view the risk-reward as increasingly unfavourable in the context of rising valuations and expectations. A new position was initiated in Airbnb, which is a leading, scalable, asset-light growth business trading at an attractive valuation. We also invested in Freeport McMoran as we expect strong operational execution and rising copper prices to continue driving positive earnings revisions.
Elsewhere we trimmed a long-held position in American Tower to reflect persistent rate headwinds and took some profit in Mercedes and LVMH after a period of particularly strong performance. Keysight and Chubb were also trimmed to recognise some emerging risks to earnings. We continue our focus on bottom-up, fundamental research, and are preparing for a range of potential future paths with a strong bench of new ideas.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_Feb-2023-1.pdfJanuary, 2023
The market outlook remains volatile, and after a tumultuous 18 months, further significant change is likely in 2023. A central scenario is a period of weaker economic growth and declining inflation, which should drive further downgrades to earnings expectations, and at least a pause in central bank rate hikes. Financial markets are already beginning to discount this outcome; however market leadership remains in flux given uncertainties around the downside in both economic growth and corporate earnings, the persistence of wage inflation, and the impact of Chinese re-opening.
During January, global earnings forecasts dropped by - 1.5%. Noticeably, the US reporting season has been weaker than usual, with forward guidance from many companies also disappointing. Over the last three months, global earnings revisions have -1.8%, with most sectors seeing downgrades. Previous leaders Technology and Communications are now clear laggards, and Energy is seeing accelerating downgrades due to the lower oil price, although some defensive sectors like Utilities, Real Estate and Consumer Staples are holding up relatively better. A reset in the outlook for earnings is one outstanding factor necessary to fully resolve new market leadership.
The overall portfolio positioning is largely unchanged, with our defensive flagship stocks remaining a key component, in combination with various specific growth stocks. Portfolio activity was limited during the month. We continued to trim a few stocks which have done very well and are seeing rising valuations and expectations, such as UnitedHealth and LVMH. We also trimmed Danaher on its current orderbook headwinds from postCovid normalisation, as well as Apple after a quarterly report showing market expectations on key consumer products are still a bit too high. We added to our position in Starbucks on signals that the re-opening of China and return-to-office trend in the US is setting the company up for a positive 2023. We continue our focus on bottom-up, fundamental research, and are preparing for a range of potential future paths with a strong bench of new ideas.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_Jan-2023.pdfDecember, 2022
The outlook remains challenging, and after a particularly tumultuous last 18 months, further significant change is likely over the year ahead. Our central scenario is a transition from weaker economic growth and rising inflation, towards an environment where both growth and inflation will likely decline, which should drive further downgrades to earnings expectations, and at least a pause in central bank rate hikes. Financial markets are already beginning to discount this outcome; however, market leadership remains unclear given uncertainties remain around recession risks, downside in corporate earnings, the persistence of wage inflation and the impact of Chinese reopening.
Our fundamental analysis and company meetings suggest that further earnings downgrades are likely, with margins potentially the biggest negative surprise. Consensus expects positive Earnings Per Share (EPS) growth in 2023 for the MSCI World Index (+2.8% y/y), including margin expansion, which looks unlikely. Our work on earnings cycles indicates that our Global Diffusion Index bottoms 3- 6 months before actual earnings revisions, which is usually associated with new cyclical leadership.
Portfolio positioning is largely unchanged with our flagship defensive stocks remaining a key component, in combination with various specific, idiosyncratic growth stocks.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/195912515.pdfNovember, 2022
The outlook for growth remains challenging. The global economy is still struggling with high inflation, an abrupt tightening of financial conditions and of course a strong dollar. Together these represent significant headwinds for growth, pressuring real wages, consumer confidence and housing markets in the U.S. and across the world. While there are some recent signs of moderating inflationary pressures in the U.S., which could translate into a less hawkish US Federal Reserve (Fed), there is a risk that this will be too late to avoid a sharp slowdown in global growth and corporate earnings
There has been a recent acceleration in cuts to global earnings forecasts, and we are now in one of the steepest downgrade cycles seen over recent years. However, analysts still appear to be behind the curve on earnings estimates for 2023, and we expect the trend to continue. Over the last three months, global earnings expectations have fallen by -3.1%, with negative revisions across across nearly all sectors. More defensive sectors such as Utilities, Consumer Staples and parts of Financials have held up relatively better, while downgrades are steep in more cyclical sectors such as Materials, Communications and Technology.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_Nov-2022-1.pdfOctober, 2022
The outlook for growth remains challenging. The global economy is still struggling with high inflation, an abrupt tightening of financial conditions and of course a strong dollar. Together these represent significant headwinds for growth, pressuring real wages, consumer confidence and housing markets in the U.S. and across the world. While there are some recent signs of moderating inflationary pressures in the U.S., which could translate into a less hawkish US Federal Reserve (Fed), there is a risk that this will be too late to avoid a sharp slowdown in global growth and corporate earnings.
At the same time, analysts continue to be slow in recognising the full scope of the potential downturn in their 2023 earnings estimates. Over the last three months, estimates have been cut by 3.6%, with negative revisions across nearly all sectors. Utilities, Financial and Healthcare estimates have held up relatively well, whilst Materials and Industrials have experienced the sharpest downgrades. Despite these downgrades, bottom-up consensus still expects EPS growth for the MSCI World Index of +4.2%. This seems optimistic in the context of decelerating growth and margin headwinds, especially after strong EPS growth in both 2021 (+22%) and 2022 (+9.9%). Our analysis and recent overseas trips continue to suggest that further (potentially significant) earnings downgrades are likely over the next few months, especially as management provide guidance for 2023.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/192726761.pdfSeptember, 2022
The Fund underperformed the market a little in the September quarter. Positions in lithium producer IGO, health insurer Medibank Private, safety app 360; not owning gold producer Newcrest or gas pipeline APA also helped. The main detractors from returns were Goodman Group, Orora, and not owning lithium play Pilbara Resources, coal miner Whitehaven Coal, and diversified resource companies South 32 and Mineral Resources.
We expect our focus on earnings leadership will steer us through the current difficult macro environment. This sees us positioned relatively defensively at the moment but still well diversified.
While overall earnings risk into 2023 still seems biased to the downside, and this is reflected in the current portfolio positioning, it is in our view important to not get too caught up in the macro and to remain focused on individual company opportunities as well as sectors where the earnings outlook is more positive than a cursory top-down approach might suggest.
As such, the Fund has, following the August reporting season, increased its exposure a little to Qantas and to the Bank sector. It has also maintained, albeit at a slightly reduced level, the overweight to companies in the Energy sector. Qantas is currently benefitting from a very strong demand recovery which, in combination with limited seat capacity and a disciplined domestic market competitor in Virgin, has the potential to deliver a much stronger earnings recovery than is currently reflected in consensus earnings expectations. In the Bank sector, we see the market underestimating the companies’ earnings benefit from widening net interest margins while in the Energy sector, gas prices are likely to be supported by the situation in Europe for the medium term.
These stocks and sectors clearly are not without risk should a deeper recessionary scenario play out than we currently envisage, but we see that risk as well worth taking and manageable in the broader context of what remains a relatively cautiously-positioned portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AAEF_FR-Sep-22.pdfAugust, 2022
We would expect financial markets to continue to be volatile against the current macro-economic and geopolitical backdrop. Some of the large, current uncertainties are Europe heading into winter with an ongoing energy crisis, the end game for the Fed’s tightening cycle, and China’s persistence with Covid lockdowns. Meanwhile, the global earnings cycle has continued to weaken at a similar pace as before, with market earnings expectations falling another -0.3% for both 2022 and 2023 during August. With third quarter reports approaching, we have also seen a ramp up in profit warnings lately across many sectors and regions.
From a sector perspective, relative differences in earnings revisions are small, with most sectors now seeing net downgrades. Overall, aided by insights from our team’s many recent overseas research trips, we still believe earnings expectations seem overall too high. Global analysts expect nearly 10% earnings growth in the second half of 2022, which appears too optimistic.
In terms of portfolio decisions, this is a period of headwinds (macro and earnings) where individual stock picking and detailed fundamental analysis come to the fore. We have seen plenty of examples where similar companies, which operate in the same market segment, produce very different earnings outcomes. Company market position, pricing power, operational quality and management execution are big drivers of relative stock performance at the moment, which isn’t unusual when economies are slowing down, financial conditions tightening, and equity markets are volatile.
During the month, we made a few noteworthy changes to the portfolio. We added a small position in MercadoLibre, the leading e-commerce and payments platform in Latin America, after another revenue beat and with earnings having turned a corner.
We added to our positions in Waste Connections and L’Oreal after strong earnings reports, and trimmed Microsoft due to some potential earnings risks going forward. We also trimmed back ON Semi and NextEra on valuation grounds, after good performance.
We continue to look for global stocks with misunderstood and under-appreciated earnings potential, and our highest conviction and quality ideas make up our relatively concentrated portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGEF_FR_August-2022-1.pdfJuly, 2022
Overall, this is a challenging macro-economic and geopolitical backdrop, and we expect financial markets to remain volatile. The global earnings cycle has also continued to weaken, with negative revisions to forecasts across nearly all sectors and regions. Despite this, analysts still expect a rebound in the second half of the year, with earnings growth seen to recover to over 10% over last year. Based on the reporting season, and our own recent global research trips, we see further downside risks to these market expectations.
One big factor are the continued cost pressures impacting margins across a wide range of sectors, but also likely ‘demand destruction’ as inflation and higher rates undermine confidence and purchasing power. However, a negative global earnings cycle is not automatically a call on the overall market direction from here.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/189909778.pdfJune, 2022
On a global sector level, only Energy (+2%) and the defensive Consumer Staples (+1%) and Healthcare (+0.3%) sectors closed higher over the quarter. Consumer Discretionary (-18%) and Tech (-15) were the weakest performers, with inventory issues and cost pressures hurting consumer stocks while Tech stocks continued to fall as investors focused on valuations and the impact of rising rates on companies without any earnings support.
Global earnings revisions remained marginally positive (+0.8%) over the quarter but weakened towards the end with net downgrades in June (-0.4%). Analysts seem generally reluctant to cut numbers for the second half, still expecting global earnings to grow by +14% and +11% in 3Q and 4Q, respectively. Based on our own recent, global research trips we see downside risks to these market expectations, especially from continued cost pressures impacting margins across a wide range of sectors, but also likely ‘demand destruction’ as inflation and higher rates undermine confidence and purchasing power. Consequently, we expect negative revisions to accelerate over the upcoming earnings season as companies update forward guidance. Against these growing earnings risks, it’s worth noting that market valuations have already contracted noticeably, with the 12-month forward p/e multiple for S&P500 falling from 21x to 16x in the first half of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/189094274.pdfMay, 2022
Inflation is running at its’ highest level since 1981, the Federal Reserve remains intent on executing the most aggressive monetary tightening cycle since at least 1994, Chinese Covid lockdowns are once again disrupting global supply chains and the fall-out from the Russia-Ukraine War continues to push energy, and various other agricultural commodities, to new highs. Consequently, it’s not surprising that expectations for global growth are falling and investor concerns are increasingly focused on whether tightening financial conditions will push the global economy into recession. This is a difficult macro-economic backdrop and we expect financial markets to remain challenging and volatile in 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/188220882.pdfMarch, 2022
Looking at AUD returns on a global sector level, it was clear that owning energy stocks (+25.7%) was the only place to hide, while Materials (-1.5%) was the next best performer. The laggards included Consumer Discretionary (-13.4%) Communication Services (- 13.3%) and Technology (-12.9%). March was a bit strange as higher growth stocks, especially tech, started to rebound despite bond yields continuing to rise sharply (US 10-year bond yield jumped 82bps to 2.33%). Perhaps the large sell-off in January and February gave investors better entry points where valuations seemed more sensible. We even saw a return (rather alarmingly) of the Reddit Day Trader Army, who punt meme stocks, those companies often with little to no value that gain cult-like followings through social media platforms.
Parallel to a slowing global economic cycle and unpredictable geopolitics, the Federal Reserve is still signalling a hawkish pivot to a tighter monetary policy, adding to market uncertainty. We are now at the two-year mark of the global recovery from the Covid lockdown bottom, and the market environment looks set to be challenging and volatile in 2022. The fourth quarter reporting season was overall positive in terms of reported earnings, but it’s clear that the extraordinary ‘earnings beat’ period of 2020- 21 is behind us. Global earnings revisions for 2022 were still positive +3.3% for the quarter but continued to deteriorate throughout the period (+1.4% in March). It was widely believed the recent correction had flushed out many of these players, but it appears that the army marches on. A 45% increase in oil prices over the quarter led energy stocks higher, although pain at the pumps increased the risk of further drops in consumer confidence. University of Michigan Consumer Sentiment has missed expectations every month last quarter and closed March with a reading of 59.4, its lowest level in 11 years. US housing data was mixed, with rising interest rates generally negative and we saw this with weaker monthly home sales in the first two months of the year, although homebuilder surveys continue to print positively along with better-than-expected housing starts. The US S&P Homebuilder group fell 31%(AUD) in the first quarter of ‘22. Consumer Confidence hitting an 11-year low Source: Alphinity, Bloomberg, 31 March 2022 Portfolio comment and outlook Parallel to a slowing global economic cycle and unpredictable geopolitics, the Federal Reserve is still signalling a hawkish pivot to a tighter monetary policy, adding to market uncertainty. We are now at the two-year mark of the global recovery from the Covid lockdown bottom, and the market environment looks set to be challenging and volatile in 2022.
The fourth quarter reporting season was overall positive in terms of reported earnings, but it’s clear that the extraordinary ‘earnings beat’ period of 2020-21 is behind us. Global earnings revisions for 2022 were still positive +3.2% for the quarter but continued to deteriorate throughout the period (+1.4% in March). Company guidance in the US was the weakest since 2019, but analysts have largely maintained their positive assumptions, and we see growing risks to earnings expectations across many pockets of global equities. Near term, we are concerned with margin expectations in the face of cost inflation in a number of companies and sectors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187078290.pdfFebruary, 2022
The overall market outlook has continued to deteriorate following the tragic Russian invasion of Ukraine, which creates significant risks of commodity supply shocks and accelerates the already ongoing global economic slowdown. Parallel to unpredictable geopolitics, the Federal Reserve is still signalling a hawkish pivot to a tighter monetary policy, adding to market uncertainty. Approaching the two-year mark of the global recovery, the financial markets environment looks set to be challenging and volatile in 2022.
The fourth quarter reporting season was overall positive in terms of reported earnings, but it’s clear that the extraordinary ‘earnings beat’ period of 2020-21 is behind us. Company guidance in the US was the weakest since 2019, and for the first time since this recovery started, we witnessed net earnings downgrades (-1.3%) by consensus for the next quarter. However, a majority of companies (and analysts) still reiterated full-year numbers, which added to a growing second-half skew for 2022. We believe downside risks to earnings are increasing across many parts of the market, especially as margin expectations are sitting well above previous records.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/184841236.pdfJanuary, 2022
The market backdrop is defined by policy tightening, elevated market valuations and a likely slowing of both economic and earnings growth. While global growth remains above trend, momentum has likely already peaked, and recent comments from the US Federal Reserve signal a hawkish pivot and a clear intention to accelerate tightening of monetary policy in the face of higher inflation. Taken together, this presents a more challenging environment for financial markets, and we expect that validation from higher corporate earnings will be even more important for equities and our portfolio this year.
After 2021 earnings growth of +57% for the MSCI World (ex Australia) Index, analysts currently expect growth to slow to only +8% in 2022. Fourth quarter earnings have so far beaten analyst expectations on average, and while expectations for 2022 earnings have inched 0.4% higher over the last four weeks, relatively mixed forward guidance has seen a marked deceleration in both the magnitude and breadth of these revisions. Ongoing supply chain and labour costs have reduced visibility for management teams
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/183910825.pdfJune, 2021
Global equity markets rose 6.9% in the quarter, lifted by strong corporate earnings, vaccine rollouts and continued policy stimulus. The US market (+8.2%) and Europe (+5.4%) led, whilst Japan was the only major market which fell (-0.5%).
From a sector perspective, the picture was more mixed in the second quarter compared to earlier stages of the ongoing global recovery. Some cyclical sectors continued to perform well (semiconductors, energy, media), but at the same time certain growth sectors also saw a strong revival from May, performing at least as well for the quarter (tech software, diversified financials). Defensive sectors overall continued to lag, in-line with previous trends. The equity moves continue to reflect the current relative earnings leadership which has been in place since the second half of 2020. US corporate earnings for the first quarter were very strong, with S&P 500 companies reporting earnings growth of 47% y/y (vs consensus of 20% y/y). Similarly in Europe, reporting season delivered the best ever pace of earnings per share (EPS) surprises going back to 2007, with weighted earnings coming in >20% better than expected and the median stock beating by 11%. Global equity analysts continued to lift earnings forecasts - during the second quarter, global earnings expectations rose by 8.2% for 2021 and 4.7% for 2022, a slightly higher pace than the first quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/175015514.pdfMay, 2021
The Alphinity Global Equity Fund enjoyed another strong month in May, generating gross alpha of c1.4%, with our portfolio continuing to enjoy earnings upgrades following an exceptional 1Q21 earnings season. This is reflected in our portfolio’s 2021 relative earnings revisions to the MSCI World index, which is already well ahead of relative beats we would normally expect for a full year.
Performance contributors were broad-based across sectors, with Morgan Stanley, Teck Resources and Target coming through in the top three positions, whilst NextEra, Vestas and PulteGroup detracted.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/173538541.pdfMarch, 2021
Global equities rose to new highs in the first quarter, with the successful roll out of vaccines, US Congress approval of another $1.9trn in fiscal stimulus and a still dovish message from the Federal Reserve together driving optimism that growth is likely to recover strongly in 2021.
Inflation expectations and bond yields both continued to rise to new post-COVID highs. The 10-year US Treasury yield closed at 1.74% versus 0.91% at the start of the year. Reflecting the improved outlook, the CRB All Commodity Index also rose by 14.2% in the quarter, with Oil (Brent Oil +22.7%) and Copper (+13.5%) notably strong.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/171127962.pdfDecember, 2020
Global equities continued to rally strongly in the fourth quarter despite new COVID lockdowns in many countries across the world, with investors choosing to focus instead on several positive vaccine announcements and the Joe Biden election victory, which have spurred hopes of a strong post-COVID economic recovery.
Positive news on the fiscal and monetary front also helped sentiment, with U.S. Congress approving additional financial support for COVID impacted businesses and households, as well as further supportive commentary from major central banks, including an extension of planned asset purchases by the European Central Bank (ECB) and Bank of England (BOE).
The MSCI World Index rallied +13.6% (in USD), led mainly by cyclical sectors including Energy (+25.5%), Financials (+23.5%) and Consumer Discretionary (+16.0%). Traditionally defensive sectors such as Consumer Staples (+5.8%), Real Estate (+8.0%) and Utilities (+8.7%) lagged on a relative basis.
Higher global growth expectations and a weaker dollar (U.S. Dollar Index -4.2%) also helped emerging markets (MSCI Emerging Markets Index +19.34%) and commodities (CRB All Commodity Index +9.3%). Oil (Brent: +26.5%), copper (+16.0%) and iron ore (+12.3%) were all particularly strong. The U.S. 10y bond yield rose 23bps to close the year at 0.91%.
Economic data during the period was generally positive and resilient despite new lockdowns and social distancing restrictions in many countries. The Morgan Stanley Global Manufacturing Purchasing Managers Index hit a new cycle high of 54.8 in December, with broad geographic strength, and a strong forward-looking new orders component which remained in expansionary territory at 57 and close to its October cycle high of 57.5. U.S. unemployment also remained generally firm, although weakened somewhat in the December Nonfarm Payroll (-140k).
The new economic growth cycle is now also evident in corporate earnings. Consensus earnings expectations for the MSCI World Index have been revised higher for both 2020 (+6.2%) and 2021 (+3.2%), with relative strength from cyclical sectors including Materials, Consumer Discretionary and Financials in both years. Defensive sectors including Health Care, Utilities and Real Estate are also experiencing positive revisions, although lagging on a relative basis. It’s also worth noting that Technology, a leading sector in the previous cycle, has experienced the weakest relative revisions over the last three months (although still positive)
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/163859111.pdfNovember, 2020
Global equities rallied very strongly in November as the MSCI World Index rose 12.7% during the month. The rally was broad but led by more cyclical regions like Europe (STOXX 600 up 16.7%), compared to the S&P 500 which was still up a significant 10.7%. By sector Energy, Materials and Financials outperformed, while defensives like Utilities, Real Estate and Consumer Staples lagged.
Markets were driven by a couple of noticeable de-risking moments during the month. The US election outcome, with a Biden-presidency but still likely Republican control of the Senate, was generally taken as supportive of both the economy and markets. The subsequent announcement of Janet Yellen for Treasury Secretary was also cheered on by the Street. Positive vaccine news further buoyed sentiment with several encouraging announcements for both COVID prevention and treatment.
Macro was mixed, with data released during the month indicating that the economic recovery continues, but with setbacks in regions which implemented new lock downs. Global manufacturing Purchasing Managers Indices (PMIs) moderated slightly in November to 53.7 after reaching the cycle high of 54.3 in October. Almost all country PMIs signal continued expansion in the manufacturing sector, while the services sector PMIs have dipped due to new restrictions.
The U.S. 10y bond yield halted its previous rise, falling marginally (-3bps) to close at 0.84%. Adding to the picture of global economic recovery, commodity prices rallied strongly with equity markets, led by Brent Oil (+25%) and Copper (+14%). The USD fell 2.3% over the period, following the general risk-on sentiment.
Global earnings expectations continued to grind higher, with consensus for 2021 earnings rising another 1.3% in the month. The rotation of the relative earnings leadership towards more cyclical sectors continued in Consumer
Discretionary, Materials, Energy and Financials. Sectors such as Information Technology, Health Care and Consumer Staples are now seeing the weakest relative earnings revisions.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/162928891.pdfOctober, 2020
Our conviction in the sustainability of the current global growth cycle continues to build. What began as a snapback in activity post initial COVID lockdowns, relatively weak and patchy at first, has been sustained over the last several months despite second and even third waves of COVID infections in many countries. Recent events now suggest that the outlook for growth may have improved further, with political and vaccine-related news set to improve corporate and consumer confidence over the next few months.
At the time of writing, uncertainty around US elections is fading fast. Although Democrats appear to have fallen short of taking control of the Senate, meaning that pre-election expectations of a so-called 'blue-wave', and a significant 'Biden green deal', will be disappointed, we view a split government as a market friendly outcome to the extent that it keeps policy within the moderate consensus. At the same time prospects for an effective vaccine have significantly improved, with widespread availability increasingly probable next year. Meanwhile central banks should remain highly supportive, committed to keeping policy rates flat for several years, on top of further fiscal stimulus which is still likely in the U.S. and elsewhere. While this unusual level of policy support may continue to underpin valuations on the 'growth' side of the market, a stronger economic recovery makes a change in market leadership - away from expensive 'growth' stocks towards relatively cheaper, more cyclical, stocks and sectors – increasingly probable.
Near-term risks from lockdowns and the gap to additional fiscal support and widespread vaccine availability remain, however we continue to tilt the portfolio towards more cyclically sensitive stocks where we can build conviction about the outlook for earnings, while also remaining invested in growth stocks where we still see valuation support. During the month we entered Infineon Technologies, funded through the sale of Roche and taking some profit in American Tower and ASML.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/161188182.pdfticker: HOW0164AU
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factsheet_url:
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https://investmentcentre.moneymanagement.com.au/factsheets/MI/e50h/alphinity-global-equity-unit-price-consolidation-
release_schedule: Monthly
fund_features:
The Alphinity Global Equity Fund offers a select portfolio of leading global companies identified as undervalued as they enter an earnings upgrade cycle. Highly diversified across countries, sectors and currency.
- Fund provides access to global opportunities and diversification not readily available to individual Australian investors.
- A united and deeply experienced team of global portfolio managers each with over 20 years in the industry.
- A disciplined process finding quality businesses with strong earnings that are under appreciated by the market.
- An actively managed concentrated portfolio of 30-45 of our best ideas, highly diversified across sectors and regions.
manager_contact_details: Array
asset_class: Foreign Equity
asset_category: Large Blend - Fundamental
peer_benchmark: Foreign Equity - Large Fundamental Index
broad_market_index: Developed -World Index
structure: Managed Fund