Monthly management comment
Macro & Politics: “The good, the bad and the ugly: US mid elections, G20 meeting and the Fed ”
All eyes are focused on today’s US elections. Democrats seem to have the upper hand but polls have often been wrong in the last few years. Will Trump have free hands to continue its tax cutting high deficit running policies or will the democrats hold the power to curb his plans? Whatever the outcome, the president will still have the power to enforce trade sanctions, the major culprit in our eyes for the current world turmoil. Latest statements show that there is finally some hope for an agreement to be found during the forthcoming G20 meeting in Argentina at the end of the month. In the meantime, the US economy remains very strong with GDP growth above 3% y-o-y and reaching unem-ployment figures not seen since the 1960’s. Wage inflation is finally showing some strength, giving a strong argument for the Fed to continue its tightening. President Trump does not like the hawkish stance of the central bank and says it could jeopardize the upswing in the US. Seeing the stormy markets in October, we would probably agree and hope the Fed will put a hold on its expected next interest rise in December.
Markets: “Too late to run for shelter / 80 % of earnings beating estimates”
Last month, we did not foresee the large corrections in most markets as we expected healthy earnings. Equity markets lost between 5.9% (Eurostoxx 50 ) and 9.1% (Nikkei). 2018 is proofing a very difficult market for investors with most indexes in negative territory (-8.2% for the Stoxx 50, -10.8% for the Dax).
The selloff was the sharpest 1-month selloff from a new high in 50 years and it is very hard to keep your positions in such extreme market conditions. Still the average US company had 8% sales growth and almost 23 % earnings growth and beat the estimate by 7%.
Recent earnings and the market correction have reduced valuation to historical-ly decent levels. Here are some examples of figures announced by some of our holdings: BABA: earnings 20% above consensus, revenues up 54% y-o-y / Tomra revenues up 21%, gross margin 44% / Intuitive surgical 3rd quarter revenues up 14% / Netflix adding 6.96 subscribers in the last quarter vs fore-cast of 5 million.
Although markets anticipate future slowdowns, we still feel that the momentum will last longer than currently expected. We also feel that the general mood is rather fearful, not the usual euphoria preceding large corrections. Still, one need to remain cautious: we sold early October Tencent (we reduced our Chi-nese exposure on the back of current news flow), Leo Vegas (stop loss) and took some profit on Intuitive surgical. Some of these proceedings were reinvest-ed in Zalando, Stora Enso (defensive share) and Lundin Petroleum (we want to hold an exposure to oil now that Iran sanctions are adopted).
Investment Themes & Favorite stocks: “Stora Enso, Danske Bank, Lundin Petroleum ”
Stora, the large forest company that also contributes to less plastic with its environment friendly food and industrial packaging.
Danske Bank, all bad are now discounted?
Lundin Petroleum, firing on all cylinders. Production increases to come with a good timing.