Earnings opportunity: US v Europe
The performance in US equities in particular over the last 12 months has been massive. However as the below charts show that run might be coming to an end for now – with the S&P 500 12-month forward real earnings yield at all-time lows.
So while there will always be single stock exceptions to this valuation in the US, we continue to believe investors need to diversify in several ways to navigate the road ahead.
Geographic region is one of the key ways we do this. Europe, as we have discussed before, is fertile ground in this regard, with its 12-month forward real earnings yield offering a much better real return potential.
We’ve taken advantage of this opportunity over the last year and now have 37% of our portfolio exposed to continental European based companies.
A recent stock example is Yara International (OSE: YAR), a Norwegian based leading fertiliser manufacturer that owns a series of strategic assets, generates strong cash flows, and should benefit from more upwards inflationary pressures given its exposure to soft commodities. Put another way, we think there is a decent upside to returns should the commodity price cycle persist for longer. That said, even in the absence of any sustained increase in inflation, we believe the stock offers reasonable value at current prices, trading on a prospective free cash flow yield of around 5%.
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Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...