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Best value remains offshore

11 March 2019 Preston Narainsamy, is a member of the Actuarial Society of South Africa
Preston Narainsamy at Marriott

Preston Narainsamy at Marriott


Despite a backdrop of robust economic growth in 2018, market returns across the globe were disappointing. The decline was driven by a slowdown in economic activity coupled with investor fears around the possibility of a recession, given US interest rate hikes. Escalating geopolitical tensions, ranging from trade wars between the US and China to uncertainties around Brexit, further dampened investor sentiment.

Despite these uncertainties, we continue to believe that the best value remains offshore by investing in blue-chip multinationals that are market leaders in their industries. They are best positioned to capitalise on long-term trends such as consumerism, automation and ageing demographics. They also fare well throughout the interest rate, business and economic cycles, given their defensive characteristics and resilient business models.


2018 saw share prices of the world’s best dividend payers come under pressure. Although the dividend growth outlook of these stocks remains intact, prices still declined. The table below highlights the current yields of a few of these companies versus their historic averages.

Company

Dividend Yield

Current

Historic Average

Pfizer

3.3%

2.8%

Unilever

3.2%

2.8%

Medtronic

2.2%

1.3%

Loreal

1.7%

1.5%

3M

2.7%

2.6%

 

STOCK SELECTION
We adopt a security-filtering process to identify the companies best positioned to deliver reliable and growing dividends. This process consists of multiple filters, but there are three critical screens, namely economic, industry and company-specific.


Companies that make it through this process have strong brands, pricing power, robust balance sheets and cash flows, and produce goods and services that are integral to their customers. These characteristics are often underappreciated in good times, but increasingly valued in adverse market conditions.\


THE PRICE ONE PAYS FOR LONG-TERM RETURNS IS SHORT-TERM VOLATILITY
Such conditions were seen in 2018, where fears around rising interest rates resulted in investors scrabbling to sell stocks in order to lock in gains made in prior years. This behaviour depressed markets, particularly in the first world, in sectors usually considered to be safe and steady.


In times like these, emotions can get the better of investors causing them to doubt their initial investment strategies. Sensationalist journalism and market “chatter” adds to the panic. Consequently, many investors opt for the safety of cash.
With volatility likely to continue in 2019 as markets adjust to a world of higher interest rates, we encourage investors to stick with their financial plan.


LONG-TERM VIEW
To avoid hasty decision-making, one must think long-term. From this perspective volatility appears far less daunting.


Look at 3M as an example, one of the world’s premier industrial companies with an enviable track record of growing dividends and shareholders wealth. Over the last three months 3M’s price was down almost 10%. When viewed from a short-term perspective, this can create panic. However, from a long-term perspective, such declines are nothing out of the ordinary for 3M investors. Below highlights 19 quarters when 3M’s price lost more than 10% in value:

Q2'81

Q1'84

Q3'86

Q4'87

Q1’88

Q3'90

Q4’97

Q3’98

Q2'01

Q3'02

-13,1%

-11,8%

-11.50%

-21,3%

-10,7%

-10.30%

-11,2%

-10,3%

-13,8%

-10,6%

Q3’98

Q3'04

Q2’05

Q2’08

Q3’08

Q4’08

Q1’09

Q3‘11

Q2’18

Q4’18

-10,3%

-11,2%

-15,6%

-12,1%

-15,8%

-13,6%

-13,6%

-24,3%

-10,4%

-9,6%

 

INCOME-GROWTH LEADS TO CAPITAL-GROWTH
Although share prices can be volatile, over the long-term price growth is ultimately driven by dividend growth. Thus, large price declines of companies that can reliably grow dividends typically represent good buying opportunities.


Currently, the world’s best dividend payers are trading on relatively high dividend yields and offer good value. Although market volatility is disconcerting, when viewed from a longer-term perspective it likely represents a good buying opportunity.


The author of this article is Preston Narainsamy. Preston is an Investment Professional responsible for both primary and secondary research in the securities market, as well as monitoring broad macro-economic variables and has completed 9 Actuarial board exams via the Institute & Faculty of Actuaries. Preston is a member of the Actuarial Society of South Africa

 

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