■ With investors worrying whether current valuations can be justified in a higher-yield environment, equities edged lower in late February, but still managed to return small gains over the month.
■ Thanks to strong earnings beats during the latest reporting season and largely reassuring guidance, revision ratios moved significantly higher in all major regions, with the US again posting the strongest upward revisions. Importantly, earnings momentum remains by far the strongest for all cyclical sectors.
■ As a result, 2021 expected EPS for global equities continue to rise and are anticipated to grow by nearly 30%. Differences are significant between markets and sectors, with most cyclical industries expected to post strong rebounds in profitability.
■ This earnings recovery should serve as the key driver to total returns even if rising bond yields were to put some pressure on valuation multiples.
■ As a result, it is important to seek out sectors which should post strong earnings growth but also positive earnings surprises in 2021.
■ Since the start of the year, we have added exposure to industries which offer substantial leverage to the economic recovery such as global mining equities. Global miners’ ROEs and free cash flows should continue to benefit from the ongoing rebound in commodity prices.
■ More recently, we have added UK equities to gain exposure to the cyclical recovery story, especially as the UK is making excellent progress with its vaccination program me. Moreover, UK equities look the cheapest relative to their own history but also when compared to other major regions.
■ We believe that the current environment continues to argue for the barbell strategy that we have put in place in recent months between our high-quality rans formational growth themes and cyclical exposure.
■ Moreover, given current rich equity valuations, we have taken advantage of market opportunities – with the VIX having returned to pandemic-era lows – to restore asymmetry in portfolios.
