BY ERIC STURDZA
In June, the US market was predominantly concerned with May’s subpar payroll release and the UK’s referendum to exit the European Union (Brexit).
Confidence in the US’s sustained economic growth has, for the most part, been reliant on persistent gains in employment. As such, the May figure for the change in non-farm payrolls of 38k, substantially below the expected 160k, sparked broad fears. The one-time event at Verizon, which subtracted approximately 35k from that payroll result, did not put the market at ease as adjusted figures remained disappointing. However, the solid retail sales data and widened trade deficit did temper concerns until the subsequent payroll figure beat expectations. Since then, the view that monthly volatility was the main cause for such a disappointing figure has been temporarily adopted- as the most recent payroll data smoothed out the 3-month rolling number back to approximately 150k.
As mentioned in our brief commentary, Brexit complicates the growth outlook for both the UK and Europe, even though central banks will be doing their utmost to stand behind markets and support their functioning. A long period of uncertainty is still expected as politicians attempt to find the best possible path forwards. Thus, the potential impediment on global growth will most likely be a near-term headwind for U.S. enterprises with international exposures. Additionally, the Investment Adviser believes that Brexit is not thesis-altering for the Fund’s few positions holding those characteristics, due to the nature of their earnings and underlying performances being driven by secular factors and specific firm actions rather than UK/EU macro. Examples of such drivers are Visa and MasterCard’s exposure to cash-to-card conversion or Cognizant’s increased penetration in high value-added shifts towards the digital enterprise. Near-term, risks likely emanate from the political sphere, from temporary volatility in the trade channel and currency translations. On the other hand, a change in the EU and/or UK’s regulatory environment could be a potential tailwind for IT players such as Cognizant.
The Investment Adviser believes that the upcoming earnings season could be a strong catalyst for the Fund as companies confirm their strong and above-market underlying growth trajectory, especially when the S&P 500 is expected to face its 7th consecutive quarter of falling year-over-year earnings per share.
The views and statements contained herein are those of the Eric Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 13/07/16 and are based on internal research and modelling.