US corporate and economic data in-line with cautious expectations

BY ERIC STURDZA

Monthly Fund Commentary
19 May 2016

BY ERIC STURDZA

The month of April was dominated by further earnings publications and balanced macroeconomic newsflow, helping the market fluctuate in the vicinity of its former highs. Neither corporate profits nor economic statistics provided a catalyst for the markets to reprice, and while many would characterize the incoming data as underwhelming in the absolute, it seemed in-line relative to cautious expectations. Inflation metrics came down as expected, retail sales were negatively affected by a slowdown in auto sales, industrial production softened, yet jobless claims hit new lows and employment data was generally stable. Q1 GDP thus now tracks below previous expectations. Naturally, this alleviates the pressure on the Federal Reserve to implement or guide towards imminent further rate increases, stabilizes the USD and in-turn helps reduce fears from China and other emerging markets.

April was a heavy month for corporate data as a large number of S&P 500 companies published earnings. After a marked reduction of estimates during the first quarter, the percentage of companies beating expectations improved versus recent quarters. However, aggregate numbers remain uninspiring, with year-over-year earnings growth for the market at -7.5%, or -2% ex-energy, with only 4 sectors in the “green”. The Fund’s remains close to 15%, and overall the portfolio’s companies continued to report positive surprises, as evidenced by e.g. Citrix, Comcast, Visa, Mastercard, Signature Bank, etc. Universal Health Services (UHS), a significant position for some time, also marked a positive inflection with a rebound in activity and evidence of strong cost control, adding to the positive implications of managed Medicaid’s final rule published in April which should increase the long-term growth rate of its psychiatric business. After a difficult period for healthcare facilities stocks, the Investment Adviser is encouraged by the continued resilient fundamentals of UHS, its differentiated positioning and its comparatively low leverage versus other providers. On the other hand, Apple’s earnings came-in below expectations, showing strains on the iPhone upgrade cycle and a difficult business environment in China. While certainly the extent of the slowdown was disappointing, the stock’s valuation already suggests a sizable long-term decline rate which could be reconsidered with, at minimum, the ramp of the new iPhone model in the second half of the year. Allergan suffered a widely reported setback in April, with the U.S. Treasury issuing new rules to prevent inversions, thwarting its merger with Pfizer. Nevertheless, and in testimony to its quality, the company reported strong fundamental growth in its May earnings report, against a challenging backdrop for the industry. Further, Allergan is still on track to close the divestiture of its generics business to Teva as planned and should then benefit from a record cash pile, adding optionality and de-risking its profile. As such, the Fund, a shareholder of Allergan for years due to its growth and valuation profile, retains its position today.

The Fund underperformed during the month, mainly due to its lack of exposure to energy, materials, its low exposure to financials, and its overweight to Information Technology, as always a direct result of its bottom-up approach and strict selection process. Strong moves in the aforementioned sectors should reverse in the Investment Adviser’s opinion, leaving the Fund well positioned to outperform.

 

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 18/05/16 and are based on internal research and modelling.