Earnings opportunity: US v Europe

Chad Padowitz

Talaria Asset Management

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.

Source: Talaria S&P, US Bureau of Labor Statistics, Bloomberg 

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. 

Source: Talaria, S&P, Eurostat, Bloomberg 

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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The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at australianunity.com.au/wealth or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

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...

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