Why the time may be right for US financials

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in Financials.

President-elect Trump could add additional fuel to the fire. If he deregulates the Financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and would benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US Financials are fundamentally stronger, undervalued and poised for a comeback.

For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.

John Bailer – The Boston company, a BNY Mellon company

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. … read more

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Global M&A hit a post-crisis high in 2014

Regional M&A comparison in US$

We aren’t surprised to see M&A activity climbing, and, as we discussed in an earlier post (see M&A activity takes off, 3 June 2014), that may continue over the next couple of years for several reasons.

  • Corporate liquidity is still high
  • Although softening, financing terms are still attractive, as debt markets remain mostly open and supportive.
  • Political and regulatory uncertainty is slowly subsiding, enabling executives to think strategically and look further out into the future.
  • Acquirers’ stocks are rising when investors reward smart, calculated moves. This encourages other corporate management teams to be proactive.
  • Activist shareholder activity is clearly on the rise.  This has been and will continue to be a driver as activists have put up sterling performance numbers and are attracting large net flows of assets to manage.
  • The rout in oil and commodities will create M&A activity as sellers eventually realize the reduced longer-term outlook for their business.

The dramatic shift in the US dollar may slow activity as participants have to reassess the value of their operations in a different currency setting.

James M. Boyd, The Boston Company Asset Management

We aren’t surprised to see M&A activity climbing, and, as we discussed in an earlier post (see M&A activity takes off, 3 June 2014), that may continue over the next couple of years for several reasons. Corporate liquidity is still high Although softening, financing terms are still attractive, as debt markets remain mostly open and supportive. Political and regulatory uncertainty … read more

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‘Big Tobacco’ eyes E-cigarettes

e-cigarettes could expand by 7,500%

The development of electronic nicotine-delivery systems (ENDS), or e-cigarettes, is arguably the most disruptive innovation in consumer products over the past century and the market potential is substantial. Today, the global market stands at just over US$3bn in annual revenue, which puts ENDS’ market share at a mere 0.5% of the US$670 billion global cigarette industry. However, estimates suggest that the potential market for ENDS could eventually expand to US$225 billion in annual sales, nearly 75 times greater than today.

ENDS attracted roughly 250 firms to the playing field by 2012 and, unsurprisingly, explosive consumer demand is drawing the attention of larger corporations. We expect market consolidation to accelerate as ‘Big Tobacco’ becomes more comfortable with the regulatory environment.

David Sealy, Director, The Boston Company Asset Management

Source: The Boston Company Asset Management

The development of electronic nicotine-delivery systems (ENDS), or E-cigarettes, is arguably the most disruptive innovation in consumer products over the past century and the market potential is substantial. Today, the global market stands at just over US$3bn in annual revenue, which puts ENDS’ market share at a mere 0.5% of the US$670 billion global cigarette industry. However, estimates suggest that … read more

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Is the market listening to a different tune?

S&P 500 Negative & Positive Pre-announcements: 5 years

Since the second quarter of 2010, US negative earnings preannouncements have far outweighed positive ones. Yet the S&P 500 has barely stuttered. Through debt-fuelled share buybacks and other means, corporates are doing their best to mask the true underlying picture.

James Harries, Investment Manager, Newton

Since the second quarter of 2010, US negative earnings preannouncements have far outweighed positive ones. Yet the S&P 500 has barely stuttered. Through debt-fuelled share buybacks and other means, corporates are doing their best to mask the true underlying picture. James Harries, Investment Manager, Newton

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A contrarian indicator

NFIB Small Business Optimism Index

Because of the importance of small businesses to the job-creation and growth dynamics of the US economy, investors often consider current small-business sentiment as a proxy for where the market should reside. In reality, a low level of small-business optimism has signaled a favorable market environment for investors. Conversely, high levels of optimism, as witnessed in the 2005-to-2007 time period, should raise investors’ caution. Current weak sentiment supports a constructive view for US equities.

Dave Daglio, The Boston Company Asset Management

Because of the importance of small businesses to the job-creation and growth dynamics of the US economy, investors often consider current small-business sentiment as a proxy for where the market should reside. In reality, a low level of small-business optimism has signaled a favorable market environment for investors. Conversely, high levels of optimism, as witnessed in the 2005-to-2007 time period, … read more

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