BY ERIC STURDZA
Data reports released in October added little colour to the overall economic outlook i.e. moderate growth and steadily rising inflation. Nonetheless, little change is a good thing and leaves the Fed with a solid opportunity to raise interest rates in December. The month’s agenda was also filled with earnings releases and the presidential debates.
September’s payroll report was solid. Aggregate wages advanced +0.7% in September on a month over month basis after it had dropped -0.1% the previous month when global markets seemed to be facing more turmoil. Additionally, the year over year rate went from 3.5% to 4.3%. October’s payroll report also came out without any surprise and if one removes headline inflation, real consumer incomes increased around 3% year on year. So consumer spending remains solid and this in turn supports topline GDP. In other words, the September and October payroll releases had enough positive underlying attributes to currently support the Fed’s hawks’ desire to increase interest rates in December. Going forwards, markets will be closely watching (1) the outcome of the US Election, (2) the OPEC meeting in November, (3) November’s payroll result, and (4) the Italian referendum which could all generate enough volatility in global markets to throw off the Fed’s gauges of financial stability.
Presidential debates during the month generated mixed views. Generally speaking, markets perceived that Hillary Clinton did a better job and responded positively whilst the bond market seems to think that a Trump victory would increase the federal budget deficit due to his large emphasis on tax cuts and infrastructure spending. Even though polls and general sentiment favoured Clinton and the market responded positively to events backing this outcome, the Investment Adviser believed that a Trump win could be much less catastrophic than had been portrayed in the news. More details on the final outcome and its effect on the Fund will be put forward in December’s monthly commentary.
The earnings season is almost over and investors have yet again been harsh on positive surprises. The historical average of 76% of companies meeting or beating bottom line consensus forecasts has been surpassed this quarter with 81% achieving these results. Hence, the market reaction has, generally speaking, been muted and only companies reporting beats on both bottom and top lines were rewarded. To the end of October 180 companies offered these results and they have outperformed the market by more than 1% whilst those that posted negative results on both or one metric underperformed. Furthermore, after a long stretch of quarterly earnings declines year-over-year earnings have finally turned positive (approx. +1% with nearly 400 of the S&P 500 companies having reported). For the Fund, 18 companies reported their results during October with 5 missing their topline consensus expectations whilst the rest posted solid beats.
Team Health was the largest contributor to the Fund’s monthly performance as it jumped from approximately $32 a share to more than $42. The ascent was initiated when the Wall Street Journal reported that the company might sell itself to a private equity firm. As a result, profits were taken and the position closed. On the other hand, the Fund’s largest detractor was Shire. The share price dropped (by approx. 5%) after Express Scripts announced it was considering ways to manage the cost of hemophilia medicines. This news came amid the already existing drug pricing concerns that have been weighing on healthcare stocks. Nonetheless, the Investment Adviser saw this price correction as an opportunity to increase the position’s weighting. Shire is still expected to achieve a solid double digit growth over the next couple of years and outperform its peer group for the following reasons: (1) Shire has a solid late-stage pipeline with a number of diverse products that potentially have long exclusivity periods which provide very interesting risk/rewards over the short and medium term. (2) The company’s rare disease portfolio is comprised of a number of products that have very little to no competition. (3) Following the Baxalta acquisition the combined company will have multiple 9 digit franchises which will improve Shire’s overall diversity profile.
The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 15/11/16 and are based on internal research and modelling.