April saw a sustained barrage of Federal Reserve speeches and events. One count was of 45 meetings in just 20 days. With the US banking system continuing to display signs of pressure on the regional banks, central bankers were keen to demonstrate the situation was under control. We continue to see deposit flight to larger better capitalised institutions. The message from the central banks is still that they will reduce global liquidity to tame inflation, and that the US economy is set for a mild recession.
The month saw many companies report earnings. As is typical earnings estimates tend to be well managed by corporates in advance of reporting. Given a weakening economy and typical over optimism for many companies third party estimates generally declined in advance of announcements decreasing the importance of results versus consensus estimates, and enhancing the importance of future guidance from companies. We have for some time been focused on trying to position the portfolio with companies that can deal with elevated levels of inflation. Pleasingly the consumer staples names held have successfully been passing on inflation, and our healthcare, technology companies and the luxury goods names have also been less impacted than the general market.
With so much uncertainty about the future direction of central banks, and economies it was not surprising that markets were volatile. Generally shares of higher quality, less cyclical and lower growth, companies performed better than lower quality and higher growth companies. The best performing shares during the month were those providing positive earnings updates and outlooks, and conversely those that disappointed saw particularly severe share price declines.
The FTSE All World High Dividend Index gained 2.4% during the month and the Global Equity Income Model portfolio gained +4.7%. The best performers held were Admiral +15.3%, Novartis +11.7%, Roche +10.3%. There was only one holding that declined which was AT&T – 6.9%.
Admiral seemed to please investors by finally completing the exit of part of their operations in the USA which have been disappointing. AT&T reported results in line with (unchanged) consensus, however free cash generation was more modest than some had anticipated. Management had previously indicated that cash generation in the first quarter would be lower here due to increased capex spend, employee costs, and handset payments. So we envisage cash generation and consequently the share price will rebound in time.
Diversified Energy was added to the model portfolio. The company offers a high dividend yield of over 15% which looks secure given the high proportion of its gas production hedged at attractive gas prices.
Leading indictors suggest that we are past the peak of inflation which should reduce from here. Lower inflation means more scope for central banks to adopt more dovish policies, or at least to stop tightening monetary conditions. Over the next few months however the relentless messaging from the central banks will be on continued tightening. Our stock picking team continues to seek to identify those shares who we believe will do well irrespective of what those at the helms of currency printing presses decide to do next.