Global Equity Income Portfolio: May 2021

Summary

• The Global Equity Income Portfolio returned 2.1% with strong performances from Diageo, Lloyds and US Bancorp.
• With global money supply remaining very accommodative, global equities enjoyed another positive month.
• Looking forwards, after such a strong start to the year, the “sell in May and go away” adage might well result in initial weakness during the month, with central bank policy coming under increasing scrutiny.

 

Market update

The condition of easy monetary supply remains in place. During April, central bank balance sheets continued to expand while corporate earnings growth was largely positive, with quarterly updates generally ahead of market expectations. All in all, this was a positive environment for equity prices and the FTSE All-World Index climbed 4.4% during the month, and the FTSE All-World High Dividend Index returning 2.4%.

The Ashburton Global Equity Income Portfolio returned 2.1%. April was a busy month for corporate earnings. The best performing stocks held included the two banks Lloyds (+8.6%) and US Bancorp (+7.3%) which both reported earnings far ahead of consensus estimates.

The worst performers held during the month were Shell, Standard Life Aberdeen and Merck which all saw share price falls of 3.4%. All three companies also reported quarterly results during the period. Buoyed by a higher oil price, Shell reported very strong cash flows. The firm deleveraged to the tune of US $4bn during the quarter. Our team is somewhat surprised at the disappointing performance of the stock given that the PE ratio is now less than half that of largest peers and the firm generates a higher level of operating cash flow. Perhaps investors are waiting on the side-lines until the company reaches their targeted debt level and begins to accelerate shareholder remuneration. At the current oil price, we anticipate that this will occur within six months.

Standard Life Aberdeen, who surprisingly announced that they will rebrand as “Abrdn”, shares continued to fall following disappointing results and a dividend cut announced in March. Having made a good return in the portfolio since initiation, the position was exited.

Merck announced disappointing results but maintained guidance. The concentration risk around wonder drug Keytruda remains a concern, however at a depressed valuation, with a spin-off catalyst ahead and improving consensus expectations that the company looks good value while providing a dividend yield of around 3.5%.

New positions were added, Admiral, the UK insurer, and Samsung Electronics, the memory and electronics giant. 

The price of equities has risen quickly from their pandemic induced lows. Many indices are back at all-time highs. The health of the consumer looks good and data generally points to economic recoveries. Naturally then, investors start to wonder when central banks will scale back and withdraw their stimulative policies. The message from the central banks continues to be “not yet”. Some share price reactions to positive results indicates to us though that parts of the market are, arguably, fully priced. This suggests that investors should increasingly seek a somewhat more cautious approach to assessing the attractiveness of potential investments.