FPA Financial Investment Committee Policy Summary December 2021 - Opportunities" - FPA ...
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FPA Financial
Investment Committee Policy Summary
December 2021
“Regenerating
Opportunities” 1Economy / Stock Market
Outlook
“Regenerating
Opportunities” 2Q3 GDP increased by 2.1% qoq saar
GDP Forecast by various Institutions
US GDP rose by 2.1% qoq saar in Q3, a
weaker growth compared to the 6.7% growth 2021F 2022F
in the previous quarter. IMF (Oct 21) 6.0% 5.2%
During the period, on an annualised basis, Conference Board (Oct) 5.7% 3.8%
personal consumption expenditure rose by
1.6%, government consumption expenditure BOS (Oct) 5.9% 4.8%
and gross investment rose by 0.8%, gross
private domestic investment rose by 11.7%, OECD (Dec) 5.6% 3.7%
exports fell by 2.5% and imports rose by 6.1%
DBS (Oct) 6.0% 3.0%
IMF revised its US GDP growth projections Alliance Bernstein (Oct) 6.1% 3.9%
from 7.0% in July to 6.0% in October, owing to
large inventory drawdowns in the second Goldman Sachs (Nov) 5.5% 3.9%
quarter, in part reflecting supply disruptions BNP Paribus (Oct) 6.0% 5.3%
and softening consumption in the third quarter.
Wells Fargo (Oct) 5.6% 4.0%
For 2021, the US economy is expected to Capital Economics (Oct) 5.6% 2.7%
expand by between 5.5% and 6.2% while
growth in 2022 is expected to be between Source: IMF World Economic Outlook (Oct), Federal Reserve Projections (Sep), Conference Board US Forecast
(Oct), BOS Monthly Investment Guild (Oct), OECD Forecast (Dec), DWS Forecast (Sep), DBS Forecast (Oct),
2.7% and 5.3% Alliance Bernstein Forecast (Oct), Goldman Sachs Forecast (Nov), BNP Paribus Forecast (Oct), Wells Fargo
(Oct), Capital Economics (Oct)
“Regenerating
Opportunities” 3Strong fiscal stimulus to support growth
Bipartisan Infrastructure Bill
Bipartisan Infrastructure Bill Amount (US$ billions)
President Biden signed into law a roughly US$1
trillion Bipartisan infrastructure bill on Nov. 15 Roads, bridges and major projects 110
after the House of Representatives passed the Passenger and freight rail 66
measure on Nov. 5 on a 228-206 vote Power grid 65
Broadband 65
The US$1 trillion bipartisan infrastructure bill will Water infrastructure 55
provide further impetus for growth and is a Cybersecurity and climate change 47
critical step in implementing President Biden’s Public transit 39
Build Back Better vision. The bill will include Airports 25
US$550 billion in new federal investment in
Environment 21
America’s roads and bridges, water
Ports and waterways 17
infrastructure, resilience, internet, among
Safety 11
others.
Western water infrastructure 8
Electric vehicle charging stations 7.5
Electric school buses 7.5
Reconnecting communities 1
Total 550*
*Figures may not add due to rounding
Source: The White House
“Regenerating
Opportunities” 4Strong fiscal stimulus to support growth
Build Back Better Framework
WSJ reported that House Democrats have released their Build Back Better Framework Amount (US$ billions)
latest version of a social spending and climate bill that now Child Care and Pre School 400
would cost $1.85 trillion. The Build Back Better Framework Home Care 150
retains most of its original major elements, including funding Child Tax & Earned Income Tax Credits 200
Clean Energy and Climate Investments 555
for clean energy, universal prekindergarten, subsidized child
ACA Credits, Including in Uncovered States 130
care, and billions more for healthcare, affordable housing and Medicare Hearing 35
elder care. Housing 150
Higher Ed and Workforce 40
While the 220-213 House vote largely unified Democrats’ Equity & Other Investments 90
Subtotal 1,750
fractious centrist and progressive wings, the party will need to
Immigration 100
move the legislation through the evenly divided Senate before Total 1,850
signing it into law Source: The White House
Offsets – Estimates, Subject to Confirmation Amount (US$ billions)
The package would be financed by changes to the corporate 15% Corporate Minimum Tax on Large Corporations 325
tax code, including a new corporate minimum tax, while Stock Buybacks Tax 125
raising taxes on high-income individuals. The plan is expected Corporate International Reform to Stop Rewarding
350
to be fully paid for by asking more from the very largest Companies That Ship Jobs and Profits Overseas
corporations and the wealthiest Americans. The framework AGI Surcharge on the Top 0.02% 230
will help reverse the windfall delivered to wealthy Americans Close Medicare Tax Loophole for Wealthy 250
and large corporations in the 2017 tax cut and invest the Limit Business Losses for the Wealthy 170
IRS Investments to Close the Tax Gap 400
revenue in American families and workers.
Prescription Drugs: Repeal Rebate Rule 145
Up to a Total of: 1,995
Source: The White House
“Regenerating
Opportunities” 5US Equities
Over the past 2 months till 30 November 2021, the DJIA rose by 1.89% to 34,4483.72, the S&P 500 rose by 6.02% to
4,567.00 and the NASDAQ rose by 7.54% to 15,537.69. All three major U.S. stock indexes rose as the better-than-
expected S&P 500 earnings growth in the third quarter of 39.8% has helped to support a continue rally in US stocks and
has helped buoy sentiment. However, investors have been concerned over the Federal Reserve (Fed) asset tapering
announcement, the headwinds from supply chain disruptions and the news of the Omicron virus.
Latest data provided by MSCI as at 29.10.21 show that the MSCI US Index was trading on a forward PE of 22.23x, higher
than Factset’s calculation of S&P 500 10-year annual PE multiple of 16.60x. At the same time, MSCI US index’s current
PB multiple of 5.00x is also higher than JP-Morgan’s calculation of S&P 500 15-year average trailing PB multiple of 2.70x.
According to a recent Factset report, 82% of S&P
500 companies have reported a positive EPS Period Earnings growth (%) Revenue growth (%)
surprise and 75% of S&P 500 companies have Q1 2021 (actual) 52.2% 10.9%
reported a positive revenue surprise. Analysts also Q2 2021 (actual) 90.9% 25.2%
expect earnings growth of more than 20% for the Q3 2021 (actual) 39.8% 17.8%
fourth quarter and earnings growth of more than 40% Q4 2021 (expected) 20.9% 12.7%
for the full year. These above-average growth rates
CY 2021 (expected) 45.0% 15.7%
are due to a combination of higher earnings for 2021
and an easier comparison to weaker earnings in Q1 2022 (expected) 5.6% 9.4%
2020 due to the negative impact of COVID-19. Q2 2022 (expected) 3.7% 7.3%
CY 2022 (expected) 8.8% 7.3%
Source: Complied using data from Factset
“Regenerating
Opportunities” 6US Equities
Financial institutions expect companies in the S&P Financial institutions were mixed on the stock market. The
500 to report a profit between US$204 and S&P 500 targets for FY2022 ranges from 4,400 to 5,300.
US$207 in 2021 and between US$221 and
US$227 in 2022. As at 30 November 2021, S&P 500 was trading at 4,567
points. This implies returns between -3.7% and 16.0%.
Goldman Sachs believes corporate tax rates will
likely remain unchanged in 2022 and rise in 2023
and corporate earnings will grow and lift share S&P 500 target
prices and is projecting a yoy EPS growth of 9.2% Financial Institutions
in 2022.
2022 Expected returns
Morgan Stanley 4400 -3.7%
UBS believes that strong revenue growth will offset Bank of America 4600 0.7%
much of the drag from higher costs and expects Barclays 4800 5.1%
2022 EPS to increase by 9.7% yoy to US$227 from
Citigroup 4900 7.3%
US$207 in 2021.
UBS 5000 9.5%
S&P 500 EPS estimates
Financial Institutions DWS 5000 9.5%
2021 2022 Yoy change
Factset 205 222 8.2% JP Morgan 5050 10.6%
Citi 204 221 8.3% Goldman Sachs 5100 11.7%
Goldman Sachs 207 226 9.2% BNP Paribas 5100 11.7%
UBS 207 227 9.7% Wells Fargo 5100-5300 11.7-16.0%
Source: respective financial institutions Source: respective financial institutions, Yahoo Finance
“Regenerating
Opportunities” 7US Equities
There are also downside risks that could have a negative impact on the stock market
Rising inflation concerns
As seen over the last few months, rising inflation concerns have weighed on sentiment in the stock market. Tech growth
stocks in particular had corrected as investors pivoted to cyclical and value names that are likely to benefit from the
economic recovery.
Recent indicators suggest that prices have remained high, largely owing to supply shortages, bottlenecks and base effects.
Federal Reserve (Fed) Chairman Jerome Powell recently said that the Fed would consider speeding up the wind-down of
its easy-money policies in an effort to curtail inflation. The risk for inflation surprises and the central bank’s policy would be
important for investors to follow. If the Fed were to prompt a sooner-than-expected rate hike, the stock market could
undergo another correction.
Biden’s tax proposals could hurt corporate earnings
The Build Back Better framework will impose a 15% minimum tax on the financial statement profits of companies - those
with over $1 billion in profits - who have little-to-no taxable income.
The framework also includes a 1% surcharge on corporate stock buybacks, which corporate executives too often use to
enrich themselves rather than investing workers and growing their businesses.
Virus-related
Recent rising news relating to the Omicron variant of the coronavirus have fuelled concerns over the path of the economic
recovery. The first known US case of community transmission of the variant was recently reported. As it is not yet clear if
the new Omicron variant causes more severe disease, there is a possibility that the government could re-introduce
lockdowns measures which could derail the strong corporate earnings growth trajectory.
“Regenerating
Opportunities” 8US Equities: Our views
We are currently neutral on US equities. The better-than-expected S&P 500 earnings growth in the third quarter of 39.8% has
helped to support a continued rally in US stocks. The signed US$1 trillion Bipartisan Infrastructure Bill is likely to benefit
certain sectors due to increase in spending on infrastructure projects and other green sectors (electric vehicles and
renewables).
According to latest data provided by MSCI, the MSCI US Index is currently trading on a forward PE multiple of 22.23x, higher
than Factset’s calculation of S&P 500 10-year PE multiple of 16.60. Similarly, the current PB multiple of 5.00x is also higher
than JP-Morgan’s calculation of S&P 500 15-year average trailing PB multiple of 2.70x.
Financial institutions were also mixed on the stock market with S&P targets ranging from 4,300 to 5,300 for FY2022.
We are also mindful that there are concerns to the stock market. The risk of inflation surprises remains high and US equities
may undergo a correction if the Fed were to prompt a sooner-than-expected rate hike. Further, President Biden’s tax proposal
could also hurt corporate earnings and slow earnings growth. The recent emergence of the Omicron variant could also inject
volatility into the stock market as there is still a lot of uncertainty over when the situation will stabilise.
“Regenerating
Opportunities” 9Our Contact Details
Please contact our wealth managers for further information at:
FPA Financial Corporation Pte Ltd
60 Paya Lebar Road,
#11-02 Paya Lebar Square
Singapore 409051
Tel: (65) 6323 1788 Fax: (65) 6323 1768
www.FPAFinancial.com
Disclaimer:
The research data, information, or opinion expressed herein may include those that are provided by third parties. They are
provided by sources we believe to be reliable, but we do not guarantee their accuracy, timeliness, completeness or suitability
for any particular purpose. Any research data, information, or opinion expressed does not constitute a solicitation for the
purchase or sale of any investment.
The opinions or recommendations expressed herein are premised upon reasonably available data at the relevant time. Please
note that markets and the value of investments may experience significant fluctuations in short periods of time, which may
render the opinions or recommendations incomplete, inaccurate or inappropriate. You should take into account such
fluctuations or other material events before relying on the opinion or recommendation for assessing your investment decisions.
We shall not be howsoever liable for any opinions or recommendations being incomplete, inaccurate or inappropriate due in
whole or in part to subsequent unforeseen events.
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