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Conditions underscore the importance of cashflow
(Pictured: Bill Priest)
The best thing you can say about global, and in particular US, equity markets is that they will probably outperform bonds this year. But that is not saying much. Epoch Investment Partners’ Bill Priest has co-authored an interesting research note on the topic.
Priest, Epoch’s chief executive and joint CIO who is best known for championing the importance of free cash flow in the companies he invests in, says that, even putting aside the energy sector, the US outlook is not very rosy.
The research note, called “Have We Hit an Inflection Point?” says:
“We expect only modest global GDP growth during 2016 and 2017, and associated with that, lower-for-longer policy rates. GDP forecasts continue to be revised down and PMIs, which are the best economic indicators for signalling inflections in the cycle, continue to send mixed signals.
“Even in the US, where the economic recovery appears to be on firmer ground (witness strong employment and consumption growth), underlying fragilities remain, reflecting high debt levels, an unbalanced economy and stresses in the energy sector. Further, the outlook for earnings remains challenging, partially due to rising unit labor costs. Even on an ex-energy basis, we expect minimal earnings growth this year.
“Additionally, equity markets appear to already be fully valued and we see little room for multiple expansion from here.
“Our cautious perspective is partly due to our view that the global economic outlook is clouded by several secular headwinds, including: deleveraging, challenging demographics, weak productivity growth and China’s rebalancing.
“Bottom-line: Although we are not bearish on the outlook for global equity markets, and expect they will outperform bonds, we see only moderate upside and do not believe we have hit a significant inflection point. This suggests equity portfolios should be focused on quality companies with a proven track-record of generating positive cash flow and allocating capital efficiently.”
Epoch is represented in Australia by Grant Samuel Funds Management. For retail investors, Grant Samuel is the manager of the ‘Grant Samuel Epoch Global Equity Shareholder Yield’ fund.
