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Saxo Morningstar High Dividend EUR Q2 2022 commentary

SaxoSelect Commentaries
Instruments tradedStocks
Asset classesGlobal equities (excluding emerging markets)
Investment style High quality stocks offering attractive dividends
Dividend yield5.19%
Quarterly return-2.55% (net of fees)
Annualised volatility (since inception)17%

Market overview 

At a Glance

  • Equities and bonds continue to come under pressure from rising interest rates and persistent inflation. 
  • Fears of a recession continue, although corporate profits have remained robust so far.
  • Within equities, large performance differentials exist. Energy companies remain the standout in 2022 and growth-oriented stocks the laggards. Within bonds, short-dated bonds are holding up, while those sensitive to interest rates and credit risks have struggled.
  • Looking ahead, improving yields and valuations are a positive development for investors in pursuit of their long-term goals.
Important Perspective

For just the second time in 40 years, bonds and stocks generated losses for two consecutive quarters. The primary driver of the 2022 downturn continues to be inflation and the consequential reset in investor expectations. In this regard, uncomfortably high and persistent inflation has prompted central banks to raise interest rates, while the war in Ukraine pushes up energy prices and disrupts supply chains. Prominently, the U.S. Federal Reserve raised rates in May and June (1.25 percent) and promised more hikes until inflation reaches the 2 percent goal. 

Corporate earnings have remained robust so far, but profit margins are under pressure from rising costs, and revenue growth is in doubt as consumers rethink their spending plans. High commodity prices are also proving problematic for inflation, as oil prices keep rising. That said, other key commodities including gold, wheat, and copper have declined, perhaps as a sign of demand-led concerns surrounding the global economy.

At the sector level, energy stocks are the standout performer, while defensive, value-oriented areas of the market have lived up to their reputation and held up relatively well during the downdraft; these sectors include healthcare, utilities and consumer staples, all of which provide services that are required in both good and bad times. Generally, stocks in these categories are considered less volatile and less affected by the ups and downs of long-term market cycles. Among the laggards, the dominant trend continues to be the fall of growth stocks.

Turning to fixed income, bonds of all kinds ended the quarter in the red, as the rise in yields and decline in prices seen during the first quarter rolled on. On a look-through basis, bonds with less sensitivity to changes in interest rates are holding up relatively well. 

The strong US dollar has also significantly contributed to outcomes. Currency exposure therefore remains an important risk mitigation tool.

 

Portfolio performance (net of fees)

April2.6% 
May0.5% 
June-5.5% 
Inception (July 2016)38% 
 

Top 10 portfolio holdings (as of 30/06/2022)

NameWeight (%)
ING Groep NV4.42
Canadian Imperial Bank of Commerce3.96
Computershare Ltd3.76
Huntington Bancshares Inc3.75
Microsoft Corp3.67
Genuine Parts Co3.47
Roche Holding AG3.32
McDonald's Corp3.31
BCE Inc3.28
AT&T Inc3.27

Top Performers 

AT&T Inc
The wireless business contributes about two thirds of AT&T's revenue following the spinoff of WarnerMedia. The firm is the third-largest US wireless carrier, connecting 67 million postpaid and 17 million prepaid phone customers.

AT&T delivered generally solid telecom results for its first quarter, putting it on pace to at least meet management’s 2022 growth expectations. Evaluating profitability and cash flow is more difficult, given heavy investment in the outgoing WarnerMedia business, the complexity of the various transactions AT&T has undertaken recently, 3G wireless network shutdown costs, and typical seasonal pressures. Management remains committed to delivering USD 16 billion of free cash flow this year and USD 20 billion in 2023 under the more conservative calculation it has adopted.

Adjusted for the WarnerMedia spinoff, DirecTV transaction, and Latin American asset sale, total revenue (now roughly two thirds wireless, with most of the remainder enterprise and consumer fixed-line services) increased by 2.5 percent year over year. Wireless service revenue growth accelerated to 4.8 percent year over year, well ahead of management’s “at least 3 percent” 2022 target, on strong postpaid phone customer growth in recent quarters. That strength continued as AT&T added 691,000 postpaid phone customers during the quarter, up from 595,000 a year ago, extending the impressive turnaround in the business. After two years of torrid industrywide growth, postpaid customer additions will eventually have to match population growth more closely, but AT&T hasn’t yet seen any sign of falling demand.

Amcor PLC
Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021 following the acquisition of Bemis in 2019. Amcor’s operations span over 40 countries globally and include significant emerging market exposure equating to around 20 percent of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household and personal care end markets.

BAE Systems PLC
BAE Systems is a British global defence company. BAE has a dominant position in the UK, is a top six supplier to the US Department of Defense, and has a strong presence in key defence markets (e.g., Saudi Arabia and Australia). Exposure to programmes is well diversified. BAE derives 45 percent of sales from services and support, and 35 percent from major programmes such as the F-35 Lightning II and Eurofighter Typhoon fighter jets. The balance of sales is derived from electronic systems and cyber intelligence.

Philip Morris International Inc
Philip Morris International is an international tobacco company with a product portfolio primarily consisting of cigarettes and reduced-risk products, including heat-not-burn, vapor and oral nicotine products, which are sold in markets outside the United States. The company diversified away from nicotine products with the acquisition of Vectura, a provider of innovative inhaled drug delivery solutions, in 2021.

Philip Morris International and Swedish Match (not covered) have confirmed talks are ongoing between them regarding a potential acquisition of Swedish Match by Philip Morris. Financial terms were not disclosed but there seems to be little wiggle room for a deal to create value at a price above Swedish Match's market cap of SEK 123 billion at the close of business on May 9.

Swedish Match is a Stockholm-based market leader in nicotine pouches, moist snuff, US chewing tobacco and cigars, and it also has a smaller business in lighters. In Scandinavia, the company commands half of the market for smokeless tobacco and nicotine products, a market dominated by snus. Swedish Match is a highly profitable business with a superior profile relative to cigarettes. It generated nearly 45 percent operating margin in 2021 and has expanded profitability every year since 2016. Revenue has grown by double digits since 2018, driven by footprint expansion in the US, its smoke-free business and strong pricing power.

Imperial Brands PLC
Imperial Brands is the world's fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2021 volume of 232 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories, and it has a logistics platform in Western Europe, Altadis. Through acquisition, Imperial is the third-largest manufacturer in the US and owns the Winston and blu brands.

Worst Performers:

Samsung Electronics Co Ltd GDR
Samsung Electronics is a diversified electronics conglomerate that manufactures and sells a wide range of products, including smartphones, semiconductor chips, printers, home appliances, medical equipment and telecom network equipment. About half of its profit is generated from its semiconductor business and a further 30-35 percent from mobile handsets, although these percentages vary with the fortunes of each of these businesses. It is the largest smartphone and television manufacturer in the world, which helps provide a base demand for its component businesses, such as memory chips and displays; it’s also the largest manufacturer of these globally.

Basf SE
Base SE is a chemical company with products spanning the full spectrum of commodities to specialities. In addition, the company is a strong player in agricultural crop protection. It operates in the following segments: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition and Care, Agricultural Solutions and Other. The Surface Technologies segment that derives the majority of revenue bundles chemical solutions for surfaces in the catalysts and coatings division. Its portfolio range serves the automotive and chemical industries and includes catalysts, batter material, automotive OEM, refinish coatings and surface treatment.

Intel Corp
Intel is the world's largest logic chip maker. It designs and manufactures microprocessors for the global personal computer and datacentre markets. Intel pioneered the x86 architecture for microprocessors. It was the prime proponent of Moore's law for advances in semiconductor manufacturing, though the firm has recently faced manufacturing delays. While Intel's server processor business has benefited from the shift to the cloud, the firm has also been expanding into new adjacencies as the personal computer market has stagnated. These include areas such as the Internet of Things, artificial intelligence and automotive. Intel has been active on the merger and acquisitions front, acquiring Altera, Mobileye and Habana Labs in order to bolster these efforts in non-PC arenas.

Intel reported solid first-quarter results slightly above guidance thanks to datacentre strength. The firm is dealing with an assortment of headwinds ranging from a resurgent Advanced Micro Devices that is pressuring Intel’s CPU market share, Apple’s shift to internal CPUs for its Mac PCs, and the transition from general-purpose computing to accelerated computing that relies on the likes of Nvidia’s GPUs.

First-quarter revenue was down 1 percent year over year (when excluding the divested NAND business) to USD 18.4 billion. Client computing group (CCG) sales fell 13 percent year over year due to the ramping down of the Apple CPU and iPhone modem businesses. Despite component supply constraints, the recent Covid lockdowns in China, and inflationary pressures, management expects improved CCG sales in the second half of the year thanks to new Alder Lake and Raptor Lake products that can help Intel regain some PC share from AMD.

Westpac Banking Corp
Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

Compass Minerals International Inc
Compass Minerals currently produces two primary products: salt and specialty potash fertiliser. The company's main assets include rock salt mines in Ontario, Louisiana and the United Kingdom, as well as a salt brine operation at the Great Salt Lake in Utah. Compass' salt products are used for de-icing and also by industrial and consumer end markets. The firm also sells sulphate of potash, which is used by growers of high-value crops that are sensitive to standard potash. Compass is expanding its portfolio and plans to enter the fire-retardant market, with its magnesium chloride-based product used to combat forest fires. The company also plans to enter the lithium market. Compass will produce magnesium chloride and lithium as by-products from its sulphate of potash operation in Utah.

Compass Mineral's fiscal second-quarter results were impacted by cost inflation, as adjusted EBITDA was down 42 percent versus the prior-year quarter. It is expected that the cost of inflation will weigh on results for the remainder of the year. Additionally, lower volumes of salt are expected going forward.

Compass' shares were down more than 10 percent at the time of writing. Despite lower salt volumes going forward, Compass can raise prices to restore the profitability of its salt business for 2023.

Compass' results highlight the challenges for the company in a rising oil price environment, as the majority of its salt volumes are sold for highway de-icing at fixed prices for the fiscal year.

Outlook

There’s no use sugarcoating how badly the second quarter played out for most investors—for investors with goals in mind (which is the majority) it may feel like two steps forward and one step back. And as the second half of the year begins, attention is likely to continue surrounding the inflation threat and a potential economic recession. Behaviourally, this is an important time to remain grounded principally.

Stocks and bonds offer different mechanics, performing differently in various market environments and making them ideal core assets for the majority of investors. Further, following recent losses, the valuations for both stocks and bonds have improved, which is a broad positive that will help investors in the next chapter of their investment journey.  

Disclaimer

Saxo Markets provides personal portfolio management via its SaxoSelect service. Before entering any managed portfolio, we must first take into account your investment objectives, goals and financial situation. 

This material should be considered as a marketing communication under the Financial Conduct Authority’s rules. Saxo Capital Markets UK Limited (SCML) undertakes reasonable efforts to ensure that any information published in this communication is reliable. SCML makes no representation or warranty, and assumes no liability, for the accuracy or completeness of any information contained in this communication. 

Investing in financial products always involves risk. As a general rule, you should only invest in financial products if you understand the risks associated with them. Investing in a portfolio with currency that differs from the base currency of your account carries the risk of exposure to changes in the rate of exchange between them. See the full Managed Portfolio Disclaimer for more information. Past performance is not a guide to future performance.

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