Future Expectations gain traction as ambiguous macro data dominates Q1

BY ERIC STURDZA

Monthly Fund Commentary
22 Jun 2015

BY ERIC STURDZA

Inconclusive macroeconomic data remained center stage this month and led to somewhat subdued stock market performance. While 2015’s economic outlook remains clouded, investors did not seem too enthralled by the generally positive Q1 earnings publications and exhibited acute sensitivity with regards to guidance. In May all of the Fund’s holdings have completed their earnings publications by month end, with continued strength virtually across the board.

The economic data potpourri included another weaker-than-expected retail sales number, positive dynamics in jobless claims, a good surprise on housing starts, some unexpected signs of life in core CPI and a Q1 GDP revised down by less than consensus expectations. All in all, this combination provided few relevant insights and largely explained the rather bland statement by the Federal Reserve.  

The market’s first quarter earnings season also came to an end, generally showing underwhelming absolute results yet beating the slashed-down expectations, largely thanks to the energy sector’s surprising resilience.  As for the Fund’s companies, those publishing in May confirmed the strong trend established in April, with virtually every publication above target. Notable surprises were Comcast, Actavis and Disney, with the former posting a 7% surprise on EPS and 2.5% on sales, mainly driven by their capacity to generate new internet customers and demonstrating the robustness of their organic growth without Time Warner Cable.  Actavis also handed investors another positive surprise (both earnings per share and sales) but finding little reward in the stock price, possibly due to the lack of significant increases in guidance. Disney also maintained its impressive run with more positive surprises from virtually all of its divisions, a particularly remarkable feat given difficult comparisons with 2014. Avago, the month’s largest contributor, reported significant margin improvements which translated into a handsome beat of earnings expectations, and notably provided encouraging words around the state of the company’s end markets. This performance did not however garner enough attention, as the company also announced on the eve of its earnings its intention to acquire Broadcom, in a USD 37bn cash and share offer. With support from Broadcom management, the deal seems driven by a number of factors including some cost synergies, the desire to enlarge the product offering, a desire to diversify from volatile smartphone design cycles while earning a stronger seat at the negotiation table. For now, the Fund remains invested in Avago. 

Given the current environment, the Investment Adviser remains confident of the fundamental soundness of an investment process focusing on strong/resilient businesses at attractive valuations. As the market struggles with the interpretation of macroeconomic data and the consequences for monetary policy, further appreciation for the strengths presented by such companies seems ever more relevant.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 15/06/15 and are based on internal research and modelling.