Productivity growth acting as tailwind for economic growth in US

BY ERIC STURDZA

Monthly Fund Commentary
21 Dec 2017

BY ERIC STURDZA

The latest economic data releases remain consistent with the ongoing moderate pace of growth and are likely to support the continuation of such in the near-term. Generally speaking, the tight labour market is still expected to act as a headwind for economic growth in the US, whilst faster productivity growth should act as a tailwind.

On the monetary policy side, a rate hike in December is now expected by the market (currently implied probability of 99.3%) and as such most of the attention will focus on the Fed’s 2018 outlook. The leadership change at the U.S. Central Bank has not changed expectations, as the “still gradual, still data-dependant” approach is maintained.

Over the course of November the Fund posted an absolute return of +1.67%. In terms of total return, NetEase, Envision Healthcare and Dollar Tree were among the largest contributors from the beginning to the end of November.

Dollar Tree, Inc. reported Q3 results on 21 November. The results beat expectations, with the management raising their Q4 guidance considerably above their initial expectations.

NetEase, Inc. is an internet technology company that develops various internetlinked technologies. The business core consists of email services, web portal, and online entertainment (including online gaming). The reason behind the stock price appreciation in November (from $282 to $329) is the new mobile game “Terminator 2: Judgement Day“ launched on 4 November, which is now a top 3 game on IOS in China.

Envision Healthcare (EVHC) is a leading provider of physician-led services, ambulatory surgery center management, post-acute care and medical transportation. The Company reported mixed Q3 results at the beginning of the month and altered their guidance for the 4th quarter in a startling manner, causing the stock price to depreciate significantly. More importantly, along with the release the Company announced its intention to review strategic alternatives with all options kept open. Since these events, a private takeover has been rumoured and recently became more likely as publicly available information and feedback from the financial community point towards a more imminent takeover. The Investment Adviser believes that EVHC has become a good value investment at current levels. Even on a standalone basis the team expects the Company to recover lost share price and thinks that it has the potential to return to a high quality growth profile as long as the Company’s operating environment does not deteriorate.

Looking ahead, the Investment Adviser is excited about the portfolio’s earnings growth profile and believes that, with the current cycle maturing, investors will eventually reward those companies, which have higher earnings growth rates and are currently trading at a similar price to earnings as the S&P 500, substantially more.

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 14/12/2017 and are based on internal research and modelling.