The third quarter of 2018 has many similarities with the second quarter as investors have continued to shrug off the headlines around trade wars and political risk and remained focused on underlying fundamentals.
For the most part the data remains constructive for corporate earnings and, therefore, for equity prices.
The US economy in particular continued to display considerable strength, with annualised GDP growth of 4.2 per cent in the second quarter being followed with record highs in small business confidence and 20-year highs in consumer confidence being reported in August.
The 10-year US Treasury yield has also reached levels not seen since 2011.
President Donald Trump expanded his tariffs on imports from China to a total of $250bn (£192.7bn) of goods in September. The tax revenue resulting from the tariff (all other things being equal) will be $25bn a year, a little over 1 per cent of total Federal tax revenues.
That tax is only just over 0.1 per cent of the US economy so in and of themselves we do not think the tariffs are big enough to disrupt the global economy. But the disruption they will cause to some manufacturing and agricultural industries could make things difficult for certain individual companies.
Here in the UK, the news coverage of the twists and turns in the Brexit negotiations has led to a pick-up in the day-to-day volatility of sterling.
In aggregate, trade-weighted sterling fell just 0.2 per cent over the quarter. We expect sterling to continue to be volatile but it is unlikely to have a clear direction until the Brexit negotiations conclude.
Despite the risks, we continue to find good investment ideas in companies fitting four key attributes: sustainable competitive advantage, opportunity to grow future cashflow, value enhancing management strategy and attractive valuations.
We, therefore, have not made any changes to our overall asset allocation and we maintain our overweight position in equities.
From a sector perspective, we are marginally overweight the technology sector which has contributed strongly this quarter. We are very focused on technology companies that have the ability to grow their total addressable market and are not exposed to too much regulatory risk.
Our holdings include Apple (up 23.5 per cent), Amazon (up 19.3 per cent), Salesforce (up 18 per cent) and Microsoft (up 17.4 per cent).
Apple announced a good set of figures in August which showed that the company still has pricing power despite higher average selling prices for its iPhones; the company also showed its services businesses (e.g, the App store) are providing very stable revenue growth. Apple’s shares are on just 17 times prospective earnings, which is not expensive given the strength of the company’s franchise and the growth rate.
Amazon, on the other hand, does look expensive on a traditional price to earnings basis. The shares are currently on 85 times prospective earnings per share (EPS).