Fundamental Large Cap Core

INVESTMENT PHILOSOPHY

We believe that quality companies with a sustainable competitive advantage and cash flow generation bought at the “right price” should outperform. Patience and a long-term investment horizon allows for the compounding of companies’ cash flows.

MARKET COMMENTARY

US Equities

Equity | October 11, 2018

Sandy Sanders, Senior Portfolio Manager, US Equities

Global Intelligence Interim Outlook October 2018 - US Equities: The Backdrop Icon

The backdrop

”As this market continues, it inevitably leads to claims that we’re late in the cycle and a bear market is just around the corner, but we don’t see the evidence for that.”

The current economic cycle passed a major milestone on Wednesday August 22, becoming the longest bull run in U.S. history, having run for almost nine and a half years without a fall of 20% or more.1 As this market continues, it inevitably leads to claims that we’re late in the cycle and a bear market is just around the corner, but we don’t see the evidence for that. Fundamentals remain solid and consumers, who make up two-thirds of the economy, are in good shape: They‘re fully employed, wages are growing, and household debt levels, particularly mortgage expenses, are at a ten-year low, leaving the consumer balance sheet looking healthy.2 This is understandably having a knock-on effect on business confidence.

The NFIB Small Business Optimism Index hit its highest level since 1983 in July.3 The smaller companies this index tracks account for 90% of employment in the United States, and they‘re investing in their own businesses, hiring new employees, and spending capital in order to grow. We see this as a cash flow fly wheel, if you like, propelling the economy in the second half of the year to what we anticipate will be 3% to 4% growth. Our view is above the current consensus of 2% to 3% and is partly based on the fact that the last time small businesses were at this level of optimism, the economy went on to hit 7% growth.4 We believe the potential is there for growth to accelerate from here.

U.S. GDP growth, 1975–1985 (%)

U.S. GDP growth, 1975–1985 (%) Chart
Source: The World Bank, August 2018.
Global Intelligence Interim Outlook October 2018 - US Equities: Opportunities For Investors Icon

Opportunities for investors

”One of the most exciting areas for us at present is the growth of cloud computing.”

One of the most exciting areas for us at present is the growth of cloud computing. What we‘re witnessing is the next big wave of IT spending as companies seek to outsource their data centers in an effort to become more cost efficient. The technology giants are spending heavily in this area, with Amazon leading the way in terms of market share, followed by Google and Microsoft. The global market for the cloud is forecast to grow by 21.4% in 2018 to total US$186.4 billion, up from US$153 billion in 2017.5 For the providers mentioned above, the margins on their cloud offerings are well above those of their traditional businesses. It’s an enormous area of potential growth, and we don’t see that slowing down in the foreseeable future.

Facebook saw its share price fall in July.6 However, the company is in a unique position: It hosts the largest social media network in the world, with over two billion monthly active users.7 Those numbers provide a very high return on investment for advertisers, and those advertising revenues are being invested in privacy controls and upgrades to their platform on a far greater scale than many of their competitors, who simply don’t have the capability to match that investment. We believe this widens Facebook’s moat. We liken it to the environment the banks found themselves in in 2011/2012: They had to undertake significant compliance spending following the 2008/2009 global financial crisis, but they‘ve come through the experience stronger. We believe that in many ways this is akin to what Facebook‘s going through now.

Global Intelligence Interim Outlook October 2018 - US Equities: Risks Icon

Risks

”We remain focused on the fundamentals, and they're still solid. The latest news headlines concerning the Trump administration aren‘t going to change that.”

The obvious risks at present are political, but it’s very difficult to make an investment call around them. When we consider everything that’s been thrown at the market over the course of this bull run, whether that’s the government’s fiscal situation, terrorist attacks, the Turkish Lira crisis, and more, the market has remained steadfast and continued to look forward through these events. We remain focused on the fundamentals, and they‘re still solid. The latest news headlines concerning the Trump administration aren‘t going to change that.

Global Intelligence Interim Outlook October 2018 - US Equities: On Our Radar Icon

On our radar

”We‘re now moving away from this lower-for-longer environment to more reasonable levels of growth.”

In periods of low inflation, things happen slowly. We’ve been in a low growth environment over the last seven years, but we believe the potential is there for growth to accelerate. We‘re now moving away from this lower-for-longer environment to more reasonable levels of growth. The combination of a healthy consumer, potentially lower corporate taxes, reduced regulations, and business optimism creates an environment in which equities can do well. We have yet to see a 4% GDP growth rate so far in this recovery, and signs indicate that we can expect further steady economic expansion ahead, with limited risks of the U.S. economy overheating.

1 Bloomberg, as of September 30, 2018.
2 Federal Reserve Bank of St. Louis, September 30, 2018.
3Small Business Optimism Index Shatters Record Previously Set 35 Years Ago,“ NFIB, August 14, 2018.
4  U.S. GDP growth, 1978–1984, The World Bank, 2018.
5Gartner Forecasts Worldwide Public Cloud revenue to Grow 21.4 Percent in 2018,“ Gartner, April 12, 2018.
6Facebook Shares Plunge by a Fifth After Growth Warning,“ Financial Times, July 26, 2018.
7Number of Monthly Active Facebook Users Worldwide as of 2nd Quarter 2018 (in millions),“ Statista, July 2018.
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About the Author

2016 Mar Sandy SandersSandy Sanders

Senior Portfolio Manager, US Equities

The opinions expressed are those of Manulife Asset Management™ at the time of publication, and are subject to change based on market and other conditions. The information in this article including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Asset Management disclaims any responsibility to update such information. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife Financial, Manulife Asset Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Asset Management.