Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Premier Miton Diversified Growth Fund, wonders if optimism over the economic recovery is fading and takes a look at the profitability of the companies that make the headlines.
It all seemed to have been going so well; vaccination programmes were being rolled out, COVID was a receding threat, economic activity was picking up strongly, the outlook was positive and, with the exception of how far inflation might rise, was reasonably predictable. But over recent weeks that scenario has been questioned.
The COVID variants that are showing signs of picking up just as restrictions ease are coinciding with supply chain problems and labour shortages in certain sectors of the economy. This is causing some doubt over the strength of the economic recovery and uncertainty in the minds of investors.
Global growth prospects post 2022 are considerably less appealing than they are for this year and next, partly because the recovery phase will taper out, but also the pandemic induced scarring the world economy has suffered will have lasting negative effects. The risk that growth may not be as strong as expected is coming into focus. Indeed, data for the second quarter showed the US economy was back above the pre pandemic level and up 6.5% on the first quarter. However, expectations were for growth to be 8.4% quarter on quarter. It is only one disappointing number but we will all be watching for a trend.
Investors look ahead and therefore asset prices discount what is expected to happen in the future; when those expectations change, it can mean that markets move to reflect the change.
Bond prices have been rising as investors have moved into assets that would benefit from those changing expectations. Equity markets have reacted as well; companies that are more sensitive to economic activity have done less well, whilst those that are in more long term growth sectors have done better, more on that below. This should not be surprising, but it has been a reasonably sharp move.
Since the beginning of last year, we have been through periods of extreme pessimism and stress which have been followed by periods of optimism and markets have reflected those moods. In my opinion, we are now in a period of realism. The situation is much better than it was, but whilst the outlook is still positive, the longer term real world impact of COVID will impact, and let’s not forget we are in an economic cycle, the next part is slower.
Central banks have remained unequivocally supportive through the pandemic and that policy continues at a time of conflicting economic signals; inflation is higher than expected, whilst the spread of COVID variants is causing concerns over growth and labour.
At the recent European Central Bank meeting, they committed to maintain a “persistently accommodative monetary policy stance” and could even lower interest rates. That is very clear guidance; they will not take action that would mitigate growth prospects, indeed they will retain policy that stimulates growth, even if it is inflationary.
The US Federal Reserve was also reassuring, saying it would move policy very gradually if the US economy continues to make more progress.
Central banks have a fine line to tread to keep recovery on track and inflation dampened in a rapidly changing environment, with fairly blunt tools at their disposal. The forward guidance they provide and the language they use in how they deliver their message is vital to how financial markets react and that in itself will impact on the real world.
As I am writing this we are in the midst of the second quarter corporate results reporting season. It is worth reviewing a few noteworthy ones to see what they can tell us.
Unilever and Reckitt Benckiser are global companies listed in the UK that manufacture a wide range of consumer products and so are good indicators of consumer behaviour. They are often labelled “quality growth” or “defensive” companies meaning they show good levels of growth and should do well through difficult economic periods. They have, therefore, hit valuations that could, arguably, be termed expensive. Both announced results recently which were steady but unexciting and both commented on higher input costs. This is part of the reason concerns over inflation and growth are rising. The share prices of both companies fell sharply.
Tesla is newsworthy in many respects and the company’s second quarter earnings were no exception; exceeding $1 billion for the three months and profits more than tripled. This is a good example of a growth company growing, however, the share price has been spectacularly strong over the last two years and did not react significantly to the news.
Apple and Alphabet (Google’s listed company name) have also been loved by investors. Both produced results much better than expectations. Google’s earnings per share were $27.26 against expectations of $19.35 and Apple’s revenues from all its main areas of operation significantly beat what analysts were looking for.
Microsoft also did better than expected, although signs of competition from Amazon and Google in their cloud computing business did lead to the share price falling slightly on that news. You can’t win them all! Similarly Facebook beat estimates, but it warned that revenue growth rates would slow.
As for Amazon; their second quarter generated $113 billion of revenues and profits that beat expectations. However, the outlook for the next three months was more muted. The company guided that revenues would be below the $115 billion that had been anticipated for the next three months and also noted that COVID related costs could be $1 billion. There was good news though, as Microsoft feared, their cloud computing business is doing well.
Tesla, Apple, Google, Microsoft, Facebook and Amazon are amongst the group of very large companies that have driven stock market valuations higher and their own valuations have risen so far they are looking expensive. They need to keep growing in order to meet investors’ expectations and to support their share prices, and they are doing so; before the COVID pandemic, during it and through the recovery. Clearly their growth rates won’t last forever, as witnessed by Microsoft, Facebook and Amazon, meaning there is a risk in holding their shares; we have little exposure across our range of funds to this group. But, if economic growth is under threat, then companies that continue to grow are much sought after; we prefer ones at more attractive valuations.
Overall, the corporate results season is going reasonably well across different regions and industries, as it should be. The first half of this year was one of strong growth, it is the future that should concern us. There will be supply issues as highlighted above and company specific problems. But most sectors of the economy have been doing well.
Economies and financial markets are dynamic; with the outlook constantly changing, it is important to focus on what are the real long term driving factors. As I noted above, asset prices are starting to reflect a less rosy outlook and that is my view. Of course, I may well be wrong; that has certainly happened before. In the short term, all eyes will be on the economic data, central bank policy and corporate results, which are favourable.
The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Future forecasts are not reliable indictors of future returns
About the author
Neil Birrell, Chief Investment Officer, Premier Miton Investors
Neil Birrell is chief investment officer for Premier Asset Management and is fund manager of the Premier Diversified fund. He joined Premier in 2013 from Elcot Capital, where he was part of the team responsible for managing multi strategy investments. Neil was previously chief investment officer of Framlington Investment Management and a senior fund manager at Prolific Asset Management.
For information purposes and only to be issued to investment professionals. It is not for circulation to retail clients. It expresses the opinion of the author and does not constitute advice. Persons who do not have professional experience in matters relating to investments should always speak with a financial adviser before making an investment decision. For your protection, calls may be monitored and recorded for training and quality assurance purposes.
Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.
The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on or treated as a substitute for specific advice of any kind.
We make no warranties, representations or undertakings about any of the content of this website; including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.
Although we make reasonable efforts to update the information on this site, we make no representations, warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.
Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.