Saxo Morningstar High Dividend Q3 2019 commentary

Market overview

Positive returns were delivered for investors in Q3 2019. Unlike the first half of the year, it was developed-market government bonds that led performance, enjoying one of their finest periods thanks to central bank activity. 

Equities performed this quarter. Of note, utilities topped equity sectors and value-style companies had a notable resurgence. The laggards for this quarter were US small growth companies alongside energy and material companies. Iron ore fell 30% in the quarter alone. Emerging market equities continued to struggle as China, South Korea, Hong Kong and surrounds are well down on developed-world peers, although emerging Europe held up. 

The global economy experienced low economic growth which was supported by an active central bank response. China and major Western economies are slowing down, and recessionary signals came to surface: weak manufacturing results and the yield curve turning negative, offset by a continuation of reasonable US employment, retail and housing trends. 

The UK market was worth citing given Brexit, weaker economic data, falling energy prices, tumbling Sterling and Thomas Cook going under. Despite this, it saw a positive September which offset weakness from the Summer period.

Portfolio performance

(Performance is net of all fees) 

Best performing positions

• AT&T Inc is a wireless communication provider which connects more than 100 million devices to 70 million customers. Elliot Management, which owns 1% of AT&T, called for a strategic review to enhance shareholder value: including a more concrete allocation plan and stronger management oversight. The share price rallied 19.5% this quarter and its dividend yield stands at 5.44%.
  
  
• Apple Inc designs a wide variety of consumer electronic devices, including smartphones (iPhone), tablets (iPad), PCs (Mac), smartwatches (Apple Watch), and TV boxes (Apple TV) among others. The iPhone makes up most of Apple’s total revenue. Q3 saw Apple successfully launch their iPhone 11 and XR models and execute a prudent pricing strategy. The company’s share price rallied 18.6% this quarter. Dividend yield currently stands at 1.31%.
  
  
• SSE Plc is an energy holding company based in the United Kingdom. It currently offers a dividend yield of 6.5%, and its guided earnings-per-share for next year represents an increase compared to guidance offered in the prior 12 months. In addition, the company is on track to sell its gas production business. Q3 saw SSE increased its share price by 18.4%.

Worst-performing positions

• Pfizer Inc is one of the world's largest pharmaceutical firms.  Q3 saw the value of the position decline 12.5% due to a US patent loss on a neuroscience drug called Lyrica. Despite this, MIM is maintaining its fair value estimate of $46 per share and expect annual sales growth of 3% over the next three years.
  
  
• Invesco Ltd provides investment management services to both retail and institutional clients. Although company revenues have been encouraging, in the short term MIM believes Invesco faces a challenging Q4. Invesco’s quarterly dividend increased at the start of Q3 and the current dividend yield is 7.89%. Despite this, Q3 saw the position in the portfolio detract 15.69%.
  
  
• Amcor is a global plastics packaging behemoth, with global sales of $9.3 billion in fiscal 2018. Reported Earnings Per Share results represent a decrease compared to the same period last year. By Q3 end, the position in the portfolio detracted 10.5%, whilst the dividend yield stands at a healthy 5%.

Outlook

We are in extraordinary times. Let’s not forget, 70% of Euro zone bonds are now negative. Economic growth is souring despite record levels of stimulus. Yet, central banks continue to save the day. So, how does an investor make sense of it all? What should your asset allocation look like?

To be clear, we don’t advocate timing the market—history has shown that investors are rarely capable of correctly calling both peaks and troughs. Instead, we advocate a valuation-driven asset allocation that acknowledges the downside risk.

We believe our asset allocation research will bear fruit for clients, especially once you factor in risk. That is, we are sensitive to protecting capital given the unprecedented nature, whilst still pursuing opportunities that will deliver positive portfolio outcomes.