Misery loves companies

2 February 2012

Against the troubled backdrop of last year, market volatility was high but the financial strength of the quoted corporate sector, allied with reasonable valuations, gave support to markets.

These themes are likely to dominate again this year. The macro debate will continue to rage but the corporate sector faces the economic headwinds in reasonable financial health.

Balance-sheet strength, dividend yield and earnings’ visibility are likely to remain profitable themes.

As global asset allocators look out on an increasingly difficult world, assets displaying these sorts of attributes will look attractive relative to many of the alternatives.

This year has started, as the last one finished, with eurozone politicians thrashing around in search of a solution to their problems. Their unwillingness to admit, far less address, the nature of the difficulties is disappointing.

The UK’s departure from the most recent summit provided another smoke-screen to allow politicians to again sweep the problem under the carpet.

The communique issued from the meeting appeared to address the issues of the next crisis rather than the one we are in. It bore an uncanny resemblance to the Maastricht criteria so studiously ignored a decade earlier when the euro was set up.

Eurozone politicians will have to do better this year and Angela Merkel must decide what she and her electorate really want from the euro. The most recent Mercozy summit again did not provide grounds for optimism.

On a more positive tack, the liquidity injection by the European Central Bank over the year-end supported confidence in the region’s financial sector as a whole.

Across the Atlantic, US economic activity does seem to be gathering momentum. The US remains an entrepreneurial and resource-rich economy, with a history of solving its problems. Any resurgence here could put some of the well publicised problems elsewhere in the world in a different light.

Our stock and sector preferences are unchanged. Some downward revision to forecasts seem likely in the short term but the corporate sector is in generally rude health. We continue to favour companies with sound balance sheets, strong cashflows and good prospects for dividend growth.

Meanwhile, the recent acquisition of SCA Packaging by the UK’s DS Smith for €1.6bn shows that merger and acquisition activity is still on the radar screen of some companies but the recent profit warning from Tesco shows that care is required in any consumer-facing area of the market.

Like most fund managers, we expect volatility to continue. We want to own companies that can survive the unexpected and have the financial wherewithal to take advantage of any opportunities that present themselves.

Global economic imbalances remain and geo-political uncertainty abounds but our belief is that the type of companies we seek are of the kind that will look increasingly attractive to asset allocators in this uncertain world.

Richard Dunbar is investment director at Swip

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