FOR INVESTMENT PROFESSIONALS ONLY ... - docs.mandg.com

1 Market summaryMarket dataCurrencies: percentage change over month and YTD (Majors vs GBP)Style update: what s in vogue? Total returns in performance Global sector performance Equities market perspectiveRitu Vohora INVESTMENT DirectorFOR INVESTMENT PROFESSIONALS ONLYThe value of investments, and the income from them, will fall as well as rise and you may not get back the original amount you invested. Where any performance is mentioned, please note that past performance is not a guide to future returns (%)MSCI AC WorldFTSE All-ShareS&P 500 MSCI EuropeMSCI Asia Pac x JapMSCI (P/B) (P/E)17.

2 3x12 . 3x14 .1x14 .1x (P/E FY1) : Macquarie, as at 30 April 2018. Long minus short portfolio ex-financials (market cap weighted).Earnings yield-8%-6%2%0%-2%-4%4%6%Value (B/P)ROEROICRisk (Beta)MomentumUSEuropeJapanEmerging MarketsFar East ex. JapanGlobalUKSource: Datastream, MSCI indices, S&P indices for the US, as at 30 April 2018 April 2018 Global equities: Global equities ended April in positive territory despite continued concerns about trade wars, reduced monetary policy stimulus and negative news surrounding tech. The UK was the best-performing region followed by Europe.

3 Energy was the best performing global sector by a wide margin, helped by an oil price surge. Consumer staples was the notable laggard, given concerns around rising inflation and price pressure on margins. UK: A fall in sterling boosted earnings of FTSE 100 companies. M&A activity also pushed up prices with Takeda s 46bn purchase of Shire and a possible merger between Sainsburys and Asda. Europe: Stoxx 600 index recorded its best monthly performance in over a year. Earnings delivery has been healthy so far, with stock price reaction to earnings beats improving.

4 All size indices were up. US: Despite a bumper earnings season, US equities lagged the broader index, with worries over rising bond yields, inflation and geopolitics overshadowing strong earnings. EM/Asia ex Japan: Emerging markets were affected by dollar strength alongside rising bond yields leaving investors nervous. Other: Commodities led asset class performance in April, with Brent crude prices surging above $75. The US dollar strengthened as the US 10-year Treasury yield touched the psychological 3% mark, with inflationary risks starting to put pressure on global bond prices.

5 Source: Datastream, 30 April 2018 USEuropeJapanEmerging MarketsAsia Pacific ex. + + + + + + + + + + + le comsMaterialsTe chnologyHealthcareFinancialsReal estateConsumerdiscretionaryEnergy Aus. Dollar Yen Swiss franc Euro US of the month: Earnings season as good as it gets ?So, why haven t equity markets performed better? The apparent non-reaction from stocks can be explained by the reality that markets are forward-looking. Shareholders essentially had been paid in advance for this quarter. Today s strong results, in large part, reflect good news that was already priced in; for example, last quarter s tax-overhaul bill in the US.

6 Additionally, with elevated valuations at the start of 2018, some investors may have sold the news , to crystallize earnings: above, in-line and below estimates: Q1 18 S&P500: Q1 blended growth rates staplesUtilitiesReal estateAbove In-line Below Telecoms Real estateUtilities Consumer discMaterials Energy Financials S&P500 Industrials Consumer staplesTechHealthcare100%0%10%20%30%40%5 0%60%70%80%90%Source: Factset, 27 April based earnings beats Since late 2016, earnings have been a key catalyst for equity market performance.

7 It has been an exceptional earnings season for Q1 reporting so far, at least compared to expectations. S&P 500 companies have been delivering profits above estimates at the best pace on record. Over 50% of companies have now reported, with 80% topping analyst forecasts. In Europe and Japan numbers are somewhat softer, but still positive. Despite record profits delivery, price reaction has been muted. The average stock has risen by a paltry in the 2 days after reporting positive news, well below the typical average increase of market leadership has been narrow, with energy and consumer discretionary the only prominent sectors stepping forward.

8 However, if we look at earnings delivery across sectors, there have been broad-based beats, with companies delivering above expectations especially in healthcare, technology and consumer staples. S&P500 earnings are expected to increase by almost 25% from Q1 2017, with the majority of sectors delivering double-digit growth. The energy sector has the highest earnings growth (81%) of any sector, followed by technology (33%).TtcomWhile concerns over inflation and slower growth linger, investors should not give up on equities just yet. Providing there is still a background of growth, the S&P 500 now trades at about 17x forward earnings forecasts, down from more than 19x at January s record high price.

9 The current valuation is not far from the five-year average. But investors might need to see a few more earnings seasons like the current quarter, even at a slower pace, for another leg higher for the stock , a better economic backdrop that has been supportive of stronger earnings, is also resulting in expectations of rising interest rates and higher inflation. Companies have commented that rising input costs, through higher wages and commodity prices, could adversely impact margins. Together, this is creating a potent stew forcing stocks to remain range-bound, despite strong earnings delivery.

10 Some have therefore begun to question whether we are at peak earnings is this as good as it gets ? Particularly at a time when the threat of 3% bond yields is unnerving investors. But profit peaks don t spell the death knell for stocks. n insKey points It s been an exceptional earnings season for Q1 reporting so far, with 80% of S&P500 companies topping forecasts Broad-based earnings beats seen across sectors with healthcare and technology leading Despite record profits, price action has been lacklustre on earnings announcements Solid corporate fundamentals are needed to help equities grind higher.