It became apparent that active managers are becoming more focused on picking stocks as opposed to spending their time guessing what will happen next at a macro level. The fear of a major tail-risk event seems now to have subsided substantially, particularly following the announcement of QE3 in the US and OMT in Europe, followed by the EU plan for banking integration and common supervision.
The macro picture in the US is definitely providing clear evidence of a moderate recovery on the way. In particular, housing has surprised on the upside, providing a more powerful engine than expected with far-reaching implications across several sectors, supported by an increase in construction activity and remodelling. Affordability is at an all-time high and a mild increase in prices will also be very positive for the banking sector.
Although unemployment remains high, people with jobs now have access to financing for consumer credit as well as mortgages and benefit from very low rates, providing support for housing and autos. In particular, auto sales have been recovering steadily, reaching 14 million (on a trailing 12-month basis) from the lows of 2009, when they bottomed at just over ten million from a peak of more than 16 million pre-crisis.
Financing is available now to corporates, private consumers and homebuyers. Nevertheless there was a broad consensus that the US will not experience a very strong recovery, but moderation will allow the deleveraging process to continue at a more manageable pace.
So what are our managers focusing on in this environment? First of all, it is the first time for 40 years in the US where earnings yields for many companies are below their cost of financing with completely open credit markets. In all of the prior occasions when we had earnings yields below the cost of financing, credit markets were not open and therefore it was not really feasible to invest in companies that could undertake equity buybacks and extraordinary dividends to enhance returns and earnings to shareholders. I came across several managers who were investing in this theme across various sectors and companies. Mostly, these were companies that had solid balance sheets and strong free cash flow not required to finance a rapid growth in the current environment.
Also, the recent developments in shale oil and gas are inducing a radical change across various sectors. The shift from the US being a major energy importer to a net exporter with access to some of the cheapest gas in the world is creating numerous investment opportunities. Cheap energy will give tremendous advantage to several sectors, reducing their input costs substantially and stimulating a reindustrialisation of the US.
