BY ERIC STURDZA
The month of November remained volatile for equity markets and for the Fund. News on the economic front was mixed, with weakness on the industrial, personal spending and retail fronts and unconvincing positive revisions to GDP, led by higher inventory. However, the employment situation, the key concern of the FOMC, confirmed its trajectory away from slack, with positive surprises in payrolls and strength in hourly earnings, which in turn gave additional credence to the fixed-income markets’ expectation of a first rate hike of 25bps on 16th December.
A significant corporate action materialized in November in the form of the official announcement of Allergan and Pfizer’s anticipated merger. Given the nature of the transaction, its size, its time to completion, the regulatory/political risks and the complexity of the post-merger reorganization envisioned by management, the announcement had an underwhelming impact on the stock price, with elevated deal spreads and little enthusiasm in the Pfizer stock. While having been reduced in size, Allergan remains a significant position in the Fund given its risk/return profile, including the deal’s termination fee, and the attractiveness of the company on a standalone basis. This positive view was further supported by continued strong earnings publications, demonstrating the company’s enviable balance sheet post its divestiture of generics to Teva, and its diverse stable of growing branded products.
Overall, the markets continued to ponder the many catalytic global macroeconomic and political events ahead, and judge their respective equity-friendliness. Naturally, there are reasonable concerns in the general market around the top line growth of companies, especially translated in USD, cost controls reaching their limits, share buybacks losing their punch given higher valuations, and increasing M&A activity as symptomatic of corporate uncertainty. Against the backdrop of policy divergence and weak growth, the “no alternative” argument in favour of equities can lose its strength, except for the best of breed companies participating in the future and sporting visible competitive advantages. The Fund continues to focus on such opportunities and remains convinced of the strong potential of the current portfolio companies, all well positioned for substantial growth rates in the coming years and priced at undemanding valuations.
The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisors to the Fund as of 18/12/15 and are based on internal research and modelling.