Monthly Review – August 2023
OUR PERSPECTIVE
We now have 2nd quarter earnings results for the majority of companies in the S&P 500. The key question we ask ourselves this month is: whether the cracks we saw in corporate America and profit margins at the end of 2022 and in Q1 this year are on the mend, or whether deteriorating credit conditions are a sign of worse to come?
In aggregate, earnings per share (EPS) for companies in the S&P 500 fell for a third straight quarter, finishing down -4.1%. However, this was better than the -7% expected at the start of the reporting season. More importantly, the market’s expectations for earnings in the third quarter and indeed for 2023 as a whole, are now positive, pointing to a robust recovery in US corporate profits. Certainly, this quarter is the first in 2 years where analysts are raising their quarterly earnings expectations for the S&P 500 into positive territory.
Whilst the relatively strong quarter was driven by companies with a greater focus on the US consumer and a handful of technology companies, looking under the bonnet it’s clear that the aggregate results hide the pressure on companies in more cyclical sectors, the declines in manufacturing and difficulties to refinance debt. At the end of August, the US equity market is up almost 20% in 2023, with the price of the S&P 500 a mere 5% below its all-time at the end of 2021.
The reality is that the consequences of higher interest rates and tighter credit conditions are only now starting to show up. The probability of a rising default cycle, financial contagion, and a deteriorating labour market are definitely not reflected in valuations. Selectively, opportunities in the US market, and globally, definitely exist. But now is the time to be selective, embrace active management, and consider increasing that dry powder that is giving you a 5% plus risk free return!
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EQUITIES
Equity markets globally struggled, especially Chinese equities, which in some instances, were down double digits over the course of August. Sentiment and news flow on China is as negative as we’ve seen, and valuations are very attractive. How bad things might get remains to be seen, but the economic, demographic and financial headwinds are real. That said, security specific opportunities are bound to arise as market participants deem China to be ‘un-investable’.
On the other side of the pond, US earnings season are drawing to a close. US corporates posted a third straight quarter of negative YoY earnings growth. As discussed above, the key question is whether a corporate profit recession is all we’ll see, or whether a broader economic recession is on the horizon.
FIXED INCOME
Yields rose as sentiment towards continued disinflation faded. Yields in western economies remain inverted, especially at the shorter end as bond markets price in rate cuts in over the next 12 months. Given the demographic headwinds in debt-laden western economies, Gilts and Treasuries offering yields of 5% plus, looks attractive. Given we struggle to see how long-term inflation risks remain elevated in the absence of new quantitative easing programs, longer duration bonds offer attractive risk-reward and diversification away from risk-assets.
Whilst credit spreads widened marginally, the significant slowdown and material risks we are seeing in credit markets are not being priced accordingly and we remain underweight.
REAL ASSETS
Energy commodity price increased on the back of continued supply cuts and geopolitical uncertainty. The disinflationary benefits of the collapse in energy prices over the last 12 months are most likely behind us. Energy aside, commodities had a tough month generally, and most declined in value.
Listed Real Estate markets also struggled, in line with equity markets. The underlying economic data does not reflect a robust demand outlook. We struggle to see how commercial real estate markets avoid a more severe de-rating given the differential between cap-rates and short-term government bond yields.
SPECIALIST STRATEGIES
Our specialist strategies continue to play a significant stabilising role within our portfolios. Our managed futures & trend following exposures continue to deliver strong performance and hour market neutral and relative value hedge fund exposures had a very strong August. We retain limited exposure to private markets, both credit and equity, given our concerns regarding debt and the refinancing cycle.
CURRENCIES
Generally, we remain neutral on currencies. On the margin we note that whilst inflation and interest rate differential would support a stronger USD, we also retain some conviction in continued strength in GBP. The US Dollar however remains the global reserve currency of choice, and in a severe market sell-off, we expect it to do well. Indeed, the US Dollar Index appreciated about 1.7% over the course of August. We also retain our positive view on the Japanese Yen, which we believe is undervalued with clear catalysts for a potential revaluation on the horizon.
CONTACT US
For further information on any of our services, or if you would like to arrange a meeting with an investment manager to see how we can work with you, please get in touch.
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Shard Capital Partners LLP is a limited liability partnership, registered in England with registration number OC360394. Shard Capital Partners LLP Registered office: Floor 3, 36-38 Cornhill, London, EC3V 3NG. Shard Capital Partners LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, reference number 538762.
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
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