the sustainability of growth

With various equity indices at all-time highs, we were curiously lacking in giddy euphoria as we closed out the last decade. Perhaps this was because the Q3 reporting season was far from plain sailing, combined with geopolitical ‘tit for tat’ on trade ahead of this year’s presidential election in the US. Yet while it wasn’t necessarily the best environment for bottom-up managers, those who caught the right wave saw very strong performance.

Looking ahead, more focus on corporate earnings and interest rates is expected, while trade also needs to recover some lost momentum. On balance, corporate guidance could be somewhat stronger going forward, likely helped by global manufacturing confidence reaching its trough, along with trade stabilisation. Our most recent engagement with corporate management teams would suggest this to be the case.

Capital deployment will be watched closely, given high corporate liquidity and continued activist pressures. For growth companies, well-executed M&A, opportunistic organic investment and share repurchases will remain the most attractive way to reward shareholders.

While it may prove difficult to bet against the trio of ‘policy, politics and trade’ once more having a big impact on market momentum, the growing importance of sustainability and ESG (environmental, social and governance) pressures companies to demonstrate improvement across several themes, particularly addressing the current climate urgency. On this point, we believe disruptors, innovators and growth names that are showing genuine improvement are well placed to outperform.

Focus from management teams on ESG issues is increasing. As the reliability and acceptance of these eco-social targets grow, an increasing number of investors are paying attention to companies’ sustainability, their path to long-term growth, and their risk mitigation for business operations. Further, identifying positive outcomes and solutions to a number of pressing global issues will increasingly feature as a key driver of value creation assessment for shareholders.

Fear may have been a factor in the first fortnight of the New Year – with tensions being ratcheted up in the Middle East – yet we see decent probability for a continuation of favourable market returns this year, led by a combination of stock-specific theme exposure and some improvement in the earnings growth picture. While this may be stock-specific, there is also further upside potential from supportive valuations, some style factor rotation potentially aided by a return of equity inflows.