Margin squeeze ahead
Jeremy Thomas, head of global equities at Sarasin & Partners
US earnings have beaten forecasts by about 20% for each of the last four quarters and the breadth of US earnings revisions is the highest it has been for 20 years. Although a strong economy will continue to take profits higher, the extent to which analysts’ published forecasts continue to be surpassed will wane as margins are constrained by rising costs.
Whether companies suffer a more prolonged margin squeeze will ultimately be determined by the extent to which they are forced to offer higher wages. Although the global economy has spare capacity today, there are skills shortages, and wage growth is exceeding expectations, as firms report challenges attracting staff.
As economic momentum peaks, companies will benefit less from recovering revenues and cost cutting. Consequently, net income margins for many companies will come under pressure in the next 24 months. Consensus US net income margins for 2022 are 100bps above all time previous highs. The extent of this squeeze on margins is not embedded in market expectations.
Risk management crucial
Chris Elliott and James Knoedler, co-managers of the TB Evenlode Global Equity Fund
The robust recovery in the US has been surprisingly uneven, with a relatively small group of companies driving much of the growth in the S&P. With dispersion high, we are leaning on our proprietary valuation discipline to identify those companies that can compound cash flow over many years. Our thesis is these companies often trade at discounts to fair value as the market struggles to price long-term growth accurately.
Risk management is critical. We spend a lot of time on the qualitative characteristics of businesses, paying particular attention to three attributes critical for sustainable growth. These are structural market growth, competitive advantage, and sustainable reinvestment in the business.
The US technology services provider, Accenture, demonstrates all three. With increasing innovation in cloud, artificial intelligence, and edge computing, the technology skills required by most companies often exceed their internal capabilities. This drives structural demand for technology partners. Accenture is the leading provider, with an exceptional brand, global scale, and integration with top management. Importantly, Accenture continues to invest behind this competitive advantage, through research and development, and the acquisition of new technology skills and platforms. The combination of these three attributes gives Accenture the best opportunity to continue to compound cash flows and produce excellent returns for investors.
