Year-to-date to July 31, the Ninepoint Focused Global Dividend Fund generated a total return of -11.10% compared to the S&P Global 1200 Index, which generated a total return of -12.09%. For the month, the Fund generated a total return of 4.34% while the Index generated a total return of 6.66%.
The US economy has now officially posted two consecutive quarters of negative GDP growth (Q1 was -1.6% and Q2 was -0.9%), meeting the official definition of a recession. But the current economic environment is extremely unusual, and a significant amount of time and energy has been spent by investment strategists, market commentators and investors debating whether this should be classified as a “technical” recession as opposed to a more significant “cyclical” recession.
Without getting into the nuances of the Q1 and Q2 GDP reports, a recession call seems inconsistent with the positive earnings growth and positive jobs growth that we have seen year-to-date. For Q1 2022, the actual EPS growth rate was 4.4% according to S&P Global and non-farm payrolls increased 504,000 in January, 714,000 in February and 398,000 in March according to the US Bureau of Labor Statistics. Further, for Q2 2022, the blended EPS growth rate (with 87% of the S&P 500 companies having reported actual results) was 6.7% according to FactSet and non-farm payrolls increased 368,000 in April, 386,000 in May and 398,000 in June, again according to the US Bureau of Labor Statistics. Clearly, the Covid-19 lockdown, massive fiscal stimulus and subsequent reopening is messing with the data and our traditional understanding of economic downturns.
Unfortunately, the US CPI data remains elevated (although on a positive note, the current US weekly average retail gasoline price is down over 15% from the June peak), which suggests that the Fed is likely to keep hiking interest rates through 2022. Consistent with the inflation data, after the FOMC moved 75 bps on June 15 to a range of 1.50% to 1.75%, they hiked again by 75 bps on July 27 to a new range of 2.25% to 2.50%. Today, the futures curve is pricing additional hikes at the September, November and December FOMC meetings, implying a Fed funds rate of approximately 3.50% by December. Paradoxically, the weak GDP prints in Q1 and Q2 supported the narrative that the Fed would pause the tightening cycle earlier than expected or would even “pivot” to interest rate cuts by early-to-mid 2023, which powered a relief rally in July. We currently believe that a pause is much more likely than a pivot in 2023, assuming inflation decelerates but remains well above historical levels in the coming months.
As we’ve discussed in prior commentaries, investors have understandably started to question forward earnings expectations in a deteriorating economic environment. However, the consensus estimates have been reasonably stable around $230 for 2022 and $245 for 2023 (down slightly from prior estimates of $250), and the Q2 earnings season could be characterized as “better-than-feared”. As of the end of the first week of August, with 87% of the S&P 500 having reported earnings, 75% of the actual results have beaten expectations. Encouragingly, earnings beats have been rewarded with share price appreciation (on average) while earnings misses have not been unfairly punished (again on average), according to FactSet.
Given the incredible amount of information (some signal and some noise) that we are dealing with daily, we are focused on watching for either the negative earning revision cycle to bottom or a Fed pause/pivot to signal the eventual inflection toward a return to economic growth. In keeping with our mandates, we are concentrating our efforts on free cash flow positive, high quality, dividend growth companies and real asset investments given our positive assessment of the risk/reward outlook over the next two to three years.
Top contributors to the year-to-date performance of the Ninepoint Focused Global Dividend Fund by sector included Communication (+160 bps) and Energy (+87 bps) while top detractors by sector included Consumer Discretionary (-323 bps), Information Technology (-306 bps) and Financials (-138 bps) on an absolute basis.
On a relative basis, positive return contributions from the Communication (+378), Information Technology (+120 bps) and Industrials (+109 bps) sectors were offset by negative contributions from the Consumer Discretionary (-69 bps), Energy (-65 bps) and Consumer Staples (-30 bps) sectors.
We are currently overweight the Industrials, Health Care and Energy sectors, while underweight the Financials, Materials and Real Estate sectors. With the US economy in a recession (technical or otherwise) and inflation stubbornly elevated, we have been focused on high quality, dividend growers that have been able to consistently grow both revenue and earnings through the cycle. Although we have positioned the portfolio relatively defensively, again, we are watching for either the negative earning revision cycle to bottom or a Fed pause/pivot to signal the eventual inflection toward a return to economic growth.
The Ninepoint Focused Global Dividend Fund was concentrated in 29 positions as at July 31, 2022 with the top 10 holdings accounting for approximately 37.3% of the fund. Over the prior fiscal year, 22 out of our 29 holdings have announced a dividend increase, with an average hike of 7.0% (median hike of 6.7%). We will continue to apply a disciplined investment process, balancing various quality and valuation metrics, in an effort to generate solid risk-adjusted returns.
Jeffery Sayer, CFA
1 All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at July 31, 2022; e) 2015 annual returns are from 11/25/15 to 12/31/15. The index is S&P GLOBAL 1200 TR (CAD) and is computed by Ninepoint Partners LP based on publicly available index information.
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