US consumer data generally encouraging in May

BY ERIC STURDZA

Monthly Fund Commentary
21 Jun 2016

BY ERIC STURDZA

The view that growth is rebounding in Q2 remained plausible during May, as economic indicators stayed supportive. Data concerning the all-important US consumer and his purchasing power was generally encouraging. Additionally, both the Consumer Confidence and the University of Michigan’s Sentiment Indexes missed estimates but comfortably remained in positive territory. The government’s first quarter real GDP growth was reported at 0.8% in its second estimate, a 0.3% increase over April’s advance figure, and month-over-month industrial production, consumer price index and housing starts all surprised on the upside.

The Federal Reserve’s minutes made monetary policy once again a top priority for financial markets. Some Fed officials believed that participants hadn’t properly “priced-in” the possibility of a June rate hike and wanted to accentuate how the Fed would respond to economic developments. Consequently, the market’s re-adjustment period increased the S&P 500’s price volatility as it hit a low of 2030 to then recover close to historical highs.

April’s heavy month for corporate data was extended through May as the remaining share of S&P500 businesses reported earnings. The results were mostly encouraging relative to beaten-down expectations. The Fund also had a significant portion of earnings reports, all of which confirmed or positively surprised the Investment Adviser’s expectations, and helped generate a total return of 2.2% for the Fund – outperforming its benchmark by approximately 0.5%. Team Health Holdings, a provider of healthcare professionals outsourcing services, was a top contributor to the Fund’s monthly performance as it beat its consensus expectations by 7.6% and generated solid returns on all of its three growth drivers – acquisitions, existing contracts, and net new contracts. Another contributor was Allergan, which significantly recovered from April’s setback, as investors regained confidence in its standalone strength and moved on from the lost Pfizer deal to focus on the pending sale of its generics unit to Teva Pharmaceuticals and the improved profile this outcome would provide. Another company’s stock price which recovered from exaggerated de-ratings was Apple. After suffering from a light quarter due to strains on its iPhone upgrade cycle, a well-known value investor used this opportunity to initiate a sizeable position. As a result, and in the Investment Adviser’s opinion, Apple’s stock price reverted back towards a less extreme valuation.

The Fund’s performance in May can mainly be attributed to its overweight in Healthcare and Information Technology, both of which have outperformed other sectors this month, having lagged for much of 2016. As uncertainty about the Fed, Brexit, and other international developments trouble the financial community, the Investment Adviser believes in the appropriateness of maintaining a defensive positioning in the market.

 

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 13/06/16 and are based on internal research and modelling.