The more things change, the more they stay the same.
On the fifth anniversary of the Federal Reserve’s decision to introduce quantitative easing (QE), it is worth reflecting how little has changed despite the historic actions taken.
Even though the policy was rapidly replicated by most of the world’s major central banks, and equity markets have subsequently seen a healthy recovery, the use of unconventional monetary policy remains widespread. This continues to set the tone for global equity markets today.
The mere suggestion earlier in the year that the Federal Reserve may begin to ‘taper’ this stimulus triggered a pull-back. The recent stand-off over extending the ‘debt ceiling’ led to a deferral of these plans.
US politicians, somewhat predictably, however, reached an eleventh hour compromise and agreed to a further temporary rise in the country’s ‘debt ceiling’.
Ironically, the manner of the latest ‘debate’ may have reduced the likelihood that investors will be forced to endure such a depressing episode in the short to medium term.
The Republican Party has been most damaged – both internally and externally.
It therefore seems unlikely the party will possess the energy to attempt another episode of ‘institutional blackmail’ without a prolonged period of recuperation.
Despite the rise in markets we remain relatively cautious. Our caution should not, however, be interpreted as a sign that we believe that there will be a significant decline in equities.
By reducing the likelihood of another debt debate in the next six months, recent events could create a short-term ‘Goldilocks’ scenario in the US with diminished scope for politically induced volatility; tapering deferred; and growth rebounding as fiscal headwinds subside.
US markets, as always, set the tone for the rest of the world and therefore the path of least resistance for equities is probably upwards. Nonetheless, we continue to find it more difficult to find attractively valued opportunities than at any time in the past three years and will therefore seek to deploy our capital more selectively.
Companies we feel provide the requisite risk/reward characteristics include Danish conglomerate Maersk Group; Japanese industrial Hitachi; and the UK’s Lloyds Bank.
Maersk is active in a variety of industries, primarily in the transportation and energy sectors. The profitability of Maersk Line, its container shipping division, is normally foremost in the minds of investors.
Over the past few months, despite operating in an industry where overcapacity and pricing pressure have reached chronic levels, Maersk Line has delivered profits that exceeded consensus expectations.
By running more fuel-efficient fleets, improving network planning and ‘slow-steaming’ (that is, running the ships at lower speeds) – the company has seen unit costs drop dramatically. Trading on an estimated 2014 price to earnings ratio of only 9x and with a strong balance sheet, Maersk’s stock appears undervalued.
Hitachi is Japan’s largest comprehensive manufacturer of electrical machinery and related services. The company focuses on what it terms ‘social infrastructure and innovation’ – operating in several segments including IT, telecoms, power systems, automotive systems, consumer products and many more.
The company’s Smart Transformation Plan aims to almost double operating profit and reduce the volatility and complexity of the business. A beneficiary of yen weakness, current consensus earnings expectations appear too low. With numerous potential catalysts over the next 12 months, the stock appears significantly undervalued.
Lloyds Banking Group (Lloyds) is the UK’s largest financial service provider. Its financial performance in 2013 demonstrates the outlook for the company is as bright as it has been for quite some time. With the UK economy continuing to recover, supported by loose monetary policy and government initiatives to boost the housing market, Lloyds is well placed to benefit.
We expect that as the country’s largest mortgage provider and holder of retail deposits, the positive trends seen in its core loan book during the year so far will continue. With a supportive economic backdrop, we believe Lloyds is an excellent way to play the nascent UK recovery.