Within the strategy, J&J, JP and Microsoft were the best contributors to performance. J&J seems to be emerging unscathed from a difficult year of litigation and publicity. This has led to excessive negative sentiment which is now unwinding as investors recognise the solid fundamentals of the company. There is exciting growth ahead with a good pipeline and the firm will likely host a Device & Consumer Investor Day sometime in 2020.
Unilever and Kerry were somewhat disappointing. Unilever announced that they expect like for like growth to be slightly below their prior 3-4% target with no impact on margins. Unsurprisingly the market reacted negatively to the update and the shares fell 3% during the month. The disconnect between the valuation of Unilever and other home and personal care companies remains, and the long run growth prospects of emerging markets, where Unilever has high exposure, also continue to look attractive. Kerry shares rose in November amongst speculation that they might be involved in a major deal in global flavourings. During December competitor International Flavour & Fragrances acquired DuPont’s Nutrition & Biosciences for over US$25bn. The industry is becoming increasingly consolidated which will likely be positive for all players.
A new position was established in Comcast while consumer staples companies Diageo and Nestle were trimmed. Comcast has been adapting its business model to technological changes in the media and communications industry. Their film studio NBCUniversal is well positioned to benefit from a strong film slate which should feed into theme parks. The firm has an attractive free cash flow yield of 7%, which is considerably higher than, arguably, closest peer Disney.
2019 saw particularly strong equity returns. The majority of these returns came from multiple expansion rather than from earnings growth. The view that the equity market climbed a “wall of worry” seems fitting. Unease surrounded both the USA-China trade dispute and global economy. While something of a roller coaster throughout the year, USA-China trade seem to have been positive with the announcement of phase one of a trade deal in principle. The response of Central Banks to disappointing economic data has been to continue easy monetary policy. In our view, rates will remain low for even longer. Governments are likely to introduce fiscal measures if economies are not sufficiently stimulated.
The equity market bull run that started after the financial crisis is now one of the longest seen historically. Over the long term, returns from investing in equities ought to follow underlying returns generated by businesses. After such a strong year of equity market returns in 2019, it is natural for investment houses to caution against expectations for such strong returns to continue. In the absence of unexpected global disasters and gross overvaluations, that we seek to avoid, the environment for equity investing actually remains very positive. Some of the biggest returns from the equity market typically come in the run up to any market correction.
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