Continued signs of momentum in US stocks

01/05/2019

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In this video update, Portfolio Manager Jeremiah Buckley says that, despite worries about a slowing economy, US companies could deliver growth a while longer.

​Key takeaways:

  • Although we may be entering the later stages of the business cycle, robust capital spending and a healthy consumer could continue to deliver growth for US companies in the near term.
  • There are also attractive long-term themes within equities, such as the growth in global travel, the transition to cloud computing and the rise of Software as a Service.
  • Global trade tensions are, arguably, one of the biggest risks to equities, as companies might pare capital spending if trade uncertainty persists.

Jeremiah Buckley: We still believe there are some really attractive themes within equities that we can take advantage of over the long term. We talk a lot about the growth in global travel over time, which we continue to believe is an attractive area of opportunity, as consumers all over the world continue to travel, especially in Asia.

We also believe the transition to cloud continues to be a very economical move for enterprise applications. Only about 10% of the enterprise spending and applications are within the cloud. So we believe that the economics that the cloud provides will continue to drive opportunities, both for the companies that are providing the cloud services and for a lot of the equipment makers that are providing infrastructure – equipment that helps facilitate the growth of the cloud. Another area of opportunity continues to be ‘software as a service’, which continues to expand the total addressable market for companies that are offering subscription services.

Certainly we could be in the later stages of the business cycle. But capital spending continues to be very robust across a number of different sectors. I mention a lot the investment we are seeing in the technology sector. A lot of the benefits in the economics of that continue to be very favourable for companies, so we continue to be optimistic about continued growth and capital spending over time.

We believe the outlook for consumer spending continues to be very strong as well, and that continues to drive a lot of the economic growth that we have seen. So despite being in positive territory in the economic cycle for a long period of time, we still believe that there are some fundamental drivers that can continue to drive growth in the economy over the next couple of years.

We saw some risks show up in 2018, which led to weaker equity markets; that being geopolitical risks and then the concerns over trade wars. Obviously, trade wars are not good for the global economy and trade flows and economic flows. So that is really the risk that keeps us up at night and we continue to analyse our exposure there. So we would like to continue to see progress on a lot of the trade negotiations that are happening and getting to a resolution as soon as possible to give companies that confidence, instead of that tentativeness that could disrupt that capital spending cycle that I mentioned.

I would say we are still optimistic about free-cash-flow yields and dividend yields. We are still close to around a 2% dividend yield on the S&P 500, which we think is attractive to shareholders. We think that normalised free-cash-flow yield is much higher than that, giving companies the opportunity to invest back both in their business and return more cash to shareholders through buybacks. We have seen a very healthy and active pace of buybacks. That continues to create value for shareholders and it also gives the companies opportunities to do inorganic growth, such as merger and acquisitions or investments in companies that can help drive future growth as well. And so we still feel like the free-cash-flow yields are attractive enough that the equity space continues to be attractive and should be able to generate earnings growth going forward.





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