Given the Zero Interest Rate Policies (ZIRP) employed by most developed world central banks is driving up risk asset prices as investor search for yield and real returns and in an environment where the IMF is lowering global growth forecasts, the key question is where to from here for equity prices?
In terms of the managers Winston Capital Partners represent, Vadim Zlotnikov, Chief Market Strategist at AllianceBernstein, suggest that market participants need to pay more attention to pricing power in 2013 stating that,
“the big question investors must ask today is whether companies are capable of growing their profits ahead of expectations in a challenging market environment. According to consensus estimates, nominal GDP growth for 2013 is expected to be almost exactly the same as last year in almost every region. That means investors shouldn’t hold their breath expecting economic growth to fuel sales. Indeed, analysts expect sales growth to decelerate—yet they also forecast an acceleration of earnings. In other words, the market thinks companies are capable of boosting profit margins.
In a sluggish sales environment, we think pricing power—the ability to increase the mark-up on materials and labor— is really the key to unlock more earnings, (however), this may be easier said than done. According to our analysis, inventories have been building up across the globe, and in almost every industry from autos to telecoms, (making) it much harder for companies to charge more for their products…”
In a similar vein, Wayne Peters, Chief Investment Officer at Peters MacGregor Capital Management, agrees with Vadim in supporting those companies that have true pricing power suggesting,
“the reality, as we see it, is that current rich market valuations are supported by record-high corporate profitability. In the case of the US, it is fair to assume some of the increased profitability is due to structural changes within the economy – outsourcing of low margin manufacturing to the developing world. But to some degree we believe profitability is being fueled by debt-funded demand – excess demand that, due to operating leverage, has the potential to cause a disproportionate contraction in profitability if and when government deficit spending is ultimately brought down to a sustainable level. Rather than thinking through the implications of reduced government spending and increased taxes in the medium term, we believe market participants have anchored squarely on the potential for short-term fiscal resolutions and given present rich equity values a ‘pass’!”
“…we remain firmly of the view that we are in a secular low-growth economic environment characterised by low asset returns (interest rates are universally very low and likely to stay so for some time), low growth, and prone to shock. A focus on owning quality financial assets with pricing power and good long-term prospects remains of paramount importance!…”
And lastly Dominic McCormick, Chief Investment Officer of Select Asset Management has started to position their Multi Asset Portfolios more defensively highlighting their,
“relatively cautious approach to 2013 following a strong rally in many asset classes from the pessimistic, attractively valued levels of late 2011 and mid 2012. While growing investor optimism and the chase for returns/yield can certainly carry markets higher in 2013, and major market weakness is not our central expectation, we do believe that some major market valuations are no longer cheap and now provide a lower “margin of safety” in an environment where investors are more complacent and a range of major global macro-economic risks could continue to weigh on markets. The most current of these is the lack of progress on a sustainable long term fiscal plan for the US, a situation we doubt will be adequately remedied by the upcoming debt ceiling/expenditure negotiations…”
Given these views, it might be time to review your portfolios, the underlying positions and think through what you might do differently.
Andrew Fairweather, Founding Partners and Managing Director of Winston Capital Partners