Earnings shaky but green shoots for global growth

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Company earnings are unlikely to return to pre-pandemic levels until late 2021 at the earliest, with many companies unwilling to provide growth numbers for more than a couple of quarters, according to senior client portfolio manager at American Century Investments, Bernard Chua.

However, there are signs of green shoots in some regions and sectors.

Mr Chua said high levels of uncertainty continue to plague companies including the extent to which COVID-19 will impact short-term consumer demand and business volumes.

“Earnings guidance and expectations remain very uncertain, and there’s a wide gap in expectations compared to history. Guidance from companies themselves is far more qualitative and short-term focused.

“Despite this, many stocks are benefitting from the COVID crisis, such as technology, e-commerce and healthcare companies,” he said.

Mr Chua believes many companies are starting to focus more on post-pandemic trading conditions, and the impact of government stimulus packages which have been propping up economies worldwide.

“Fiscal stimulus has provided a bridge between COVID and post-COVID worlds in avoiding a total collapse of activity. Some high frequency indicators have suggested economic activity is recovering, such as increased freight trends, improved Apple mobility data, restaurant reservations and traffic congestion in China,” he said.

Equity markets have been led by a small group of stocks with sustained earnings growth. At some point, on the other side of the health crisis, especially when we are able to find a vaccine, we expect economic growth to gain momentum and stock market participation to broaden, making a strong case for active management.

“We’re not just focused on the absolute level of growth, or those traditional high growth companies, but we also look at the direction of growth which is a more powerful predictor of stock price performance.

“Identifying when businesses are in an early stage of inflecting in growth rate on the S curve, with multiple catalysts, leads to a sustained period of acceleration in price growth.

“Healthcare is a great example. If several companies are providing solutions for many unmet medical needs and these companies are successful at commercialising these businesses, it could be a driver of sustained growth,” he said.

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