Last week was probably the busiest and most important week for global company results in many years and it gave us a real insight into what these companies are experiencing on the global stage. The results and investor takeaways are fascinating. Our analysts and fund managers have thrived in this environment and agility has been key. Below, we summarise the most important points from these recent results releases.
Investors heaved a collective sigh of relief in recent days as 2Q20 US company results were released. To date, c. 75% of US companies have reported their 2Q20 results and, while sales and earnings were, on average, down 12% YoY, this was still significantly ahead of expectations, with sales 4% ahead of consensus analyst expectations and earnings ahead by a massive 22%. So far, so good, but it is still early days.
Global company July turnovers are in many instances close to pre-COVID levels and certain e-commerce companies’ prospects have improved dramatically, accelerating growth by many years. However, in numerous instances quick recoveries are already priced into these shares and there is a risk of high market expectations not being met. From some companies there is also an emerging trend that June/July is recovering more slowly, and the V-shaped recovery thesis is being challenged. It will take another quarter to know for sure, but the market is currently giving the US economy the full benefit of the doubt.
The aforementioned is our conclusion after the recent slew of US company results. In the last few days, we obtained valuable insights into how global businesses are faring in the current environment, as c. 40% of US companies (most of them tech majors) announced their results.
Given the sharp recovery in US equity markets, we are cautious about potential returns for the next 12 months. Below the index level, however, company specific opportunities exist. These fall into two categories: 1) Companies that will recover strongly, but whose share prices do not reflect that; and 2) those companies whose prospects have improved dramatically, and the shares still offer above-average returns.
YTD in the US, tech and related sectors are up around 20%, while the consumer, cyclical and financial sectors are, on average, down around 10%-15%. The S&P 500 Index’s 4.2% gain in July was enough to push it marginally higher (+0.5%) YTD, while the MSCI World is still down in the high single-digits.
So, what have we learnt from the recent US company results? Below, we highlight our conclusions coming out of these results announcements.
Some examples of the various company experiences that inform our views above are as follows:
An aggregation of bottom-up stories helps us understand the bigger picture. Our “gut-feel” is that, for the average business YoY US sales will record a 5% YoY decline in the coming months, with a quick pullback in place and now the recovery, which could slow slightly. However, the key point that is apparent from the facts given above is that the “average” is misleading – every company, sector and geography is different. The UK market is still down 20% YTD. This is certainly no time for passive investment – one needs to be in the right market segments and geographies. With US share prices having rebounded and high expectations built in, the price of getting it wrong is high. We remain invested but we are also cautious and selective.
We conclude with a comment on the global economy from Blackstone (the biggest global private equity investor spanning many sectors) CEO Steve Schwarzman, from the company’s recent results presentation: “The global economy has started to reopen, but as we discussed previously, the road to recovery will be uneven with divergent trends across regions and sectors. Asia is clearly further along as is Europe, both of which were impacted by COVID-19 first. In the US, the economy was surprisingly strong in terms of employment gains in May and June with 7.5mn jobs added and a reduction in the unemployment rate from 14.7% to 11.1%. We have learned that people are anxious to re-establish their lives on a personal level and in terms of their work. However, with persistent or accelerating infection levels in many states, we are seeing some reversals of reopening plans, which will likely reduce the pace of future employment gains. While no one knows the exact course of the US economy, it is likely to be slower than anticipated over the next several months as a result. However, once infection levels subside, a stronger economic recovery should occur.”