Equities — Outlook and Q2 Summary
July 21, 2010
Despite the brutal market reversal in the second quarter, our views have not changed dramatically. With an earnings yield of almost 8% for the broad market, and generally very solid balance sheets and strong cash flows, we believe that current valuations represent good value for long-term investors. The S&P 500 now trades at 12.5X forward earnings, below historical averages, and yields more than the 5-year US Treasury note.
The downturn in US equities was sparked by a worsening European debt crisis and fears about stalling US growth and a slowing worldwide economy. The market decline gathered speed throughout the quarter, finishing down 11.5%. The S&P 500 has lost almost 7% on the year.
In addition to being steep, the sell-off was broad-based, with all of the S&P industry groups declining and all 30 Dow Jones components declining in the quarter. It was also worldwide. The MSCI EAFE fell 14% in the quarter. Greece, France, and Spain declined over 10% and Germany 4%, while the Hang Seng market dropped 5%. Emerging markets did not escape the selling, with Brazil's Bovespa down 11%.
Performance
The Evercore Wealth Management Core Portfolio declined 12.4% in the quarter net of fees, compared with an 11.4% loss for the S&P 500. Since inception, the EWM Core Portfolio has returned 26.1% net of fees versus 26.9% for the S&P 500.
Apple (AAPL) was the largest contributor to performance, continuing its strong momentum from the first quarter as sales of new products like the iPad generated strong revenue and earnings growth. American Tower (AMT) was the second largest contributor, showing great business stability in the quarter. Increased use of smart devices and the resulting surge in data traffic are long-term growth drivers. AMT also has excellent international opportunities and is investing significant capital in India and Brazil.
Mastercard International (MA) detracted the most from the portfolio in the second quarter. Legislation introduced in the Senate surrounding debit fees spooked investors and caused a steep decline in MA shares. In our view, this legislation, if enacted, will have limited impact, and the stock represents great value at current prices.
Google (GOOG) was the second largest detractor. The shares have declined dramatically this year, with the biggest headlines concerning problems with the company's business in China. We find the valuation very compelling: GOOG trades at its lowest multiples of earnings (13x) and cash flow (10x) since going public.
Our Outlook
The economic strength that supported US equities in the first quarter now looks less certain. Profits remain robust in the US, however, and even after revisions, strong profit growth appears likely for the balance of the year. Overseas, the German export economy is a significant beneficiary of the weaker euro, and German non-financial corporate profits will be strong. In China, Beijing's efforts to slow the economy and restrain real estate prices have touched off concerns of a broader slowdown, but growth should still be close to 10% this year.
For both local and international companies, we find the strongest global growth and the best longterm opportunities in the emerging market economies. Many of the companies we invest in have a significant — and growing — share of sales and earnings in these emerging markets. Also, companies with a strong US presence that are benefitting from a stabilizing consumer are increasingly attractive due to both low valuations and earnings improvement.
At Evercore Wealth Management, an important analytical component has been our focus on balance sheet strength, which we believe should create opportunities in an unsettled environment. We saw this strength at work in the quarter as several portfolio holdings used their strong financial positions to make timely acquisitions, initiate significant share repurchases, and pay or reinstate meaningful dividends. These actions have helped to create shareholder value in the near term and should continue to generate value in the future.
Download: Equities — Outlook and Q2 Summary(PDF)
Important Notice: Evercore Wealth Management, LLC ("EWM") is registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. EWM prepared this material for informational purposes only. EWM prepared this material for informational purposes only. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. EWM obtained this information from multiple sources believed to be reliable as of the date of publication; EWM, however, makes no representations as to the accuracy or completeness of such third party information. EWM has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. Specific needs of a client must be reviewed and assessed before determining the proper allocation for a client and must be adjusted to market circumstances. Any opinions herein reflect our judgment at this date and are subject to change. Upon request, we will furnish a list of all securities recommended to clients during the past year. This material does not purport to be a complete description of our investment services. It is not our intention to state or imply in any manner that past results are an indication of future performance.
Performance: Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. The performance results are based upon the returns of a single, fully discretionary account with no material investment restrictions and are reported net of fees of 1%, EWM's highest fee. The account has been invested in EWM's core equity strategy since its inception. EWM manages its client portfolios according to each client's specific investment needs and circumstances. Therefore, EWM cannot affirm that the returns of the account shown above are similar to all accounts participating in the core equity strategy. This is due in part to the timing of trades, market conditions, cash availability, and the timing of client deposits and withdrawals. Prospective clients should not assume that similar performance results to those shown would have been achieved for their accounts had they been invested in the strategy during the period. The S&P 500 is the core equity strategy's benchmark. The S&P 500 is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. Unlike the S&P 500, EWM may invest in both US and non-US equities and ETF's. You cannot invest directly in an index. Index results assume the re-investment of all dividends and capital gains. In addition, the representative account's holdings will differ from the securities that comprise the index.