Our Monthly Insights
It’s no secret that US stocks have soundly outperformed their global peers for the better part of two decades, meaning that Canadian managers (such as DM) who’ve directed their foreign exposure to American names have been well-rewarded over time. The common answer for why this has occurred is that the US economy is more dynamic than most of the rest of the world and that the S&P 500 is populated with more innovative companies, valuable global brands, and effective management teams than other major markets. While this is true, not all of the S&P’s advantages can be attributed to corporate superiority.
The chart below shows the composition of US outperformance since 2010, which, as you can see, includes healthy contributions from two variables that have little to do with the management or profile of individual American companies. In the illustration, “fundamental return” is represented by gross profit (i.e. revenue less cost of goods sold) in an effort to eliminate the impact of different global accounting methodologies on net income, or earnings. While this intrinsic source of value creation has been significant in relation to the rest of the world, by far the two biggest contributors to US equity market excess return have been the persistent strength of the dollar and the significant expansion of US equity valuations over time (in other words, the willingness of investors to pay more for each dollar of earnings).
As the US led the world out of the sub-prime crisis and later the covid ca-lamity, it’s not surprising that the USD caught a continuing bid as inves-tors were drawn to safety and strength; with the US now fighting balloon-ing deficits and debt, however, this tailwind could become a drag. Investors have also been attracted to US assets — especially tech stocks — such that equity valuation differentials have reached all-time highs. Again, it’s far from certain that this factor will continue to expand from already stretched levels. We believe that these characteristics support a marginal asset allocation shift from US to global equities and have been affecting this for clients through the recently launched DM Intl. Equity Fund.
Portfolio Activity
In October, we reduced our position in Manulife Financial on the Canadian side of equity mandates and deployed these funds to Wheaton Precious Metals and Intact Financial. In DM US Equity, we fully liquidated our position in Comcast Corp. and redirected this capital to Certara Inc. and Intercontinental Exchange.
Feature Stock
HCA Holdings Inc. (HCA)
Shares of HCA, the largest hospital operator in the US, have appreciated by 11% so far in the fourth quarter and by more than 57% year to date. This robust performance has been driven by a string of strong earnings reports, including a Q3 release that showed a 9.6% revenue increase over the same period last year and a 29% jump in net income.
Management also upped its revenue guidance range for the year ahead from $74-$76bn to $75-$76.45bn. Earnings growth in the most recent quarter was driven by both positive volume trends, particularly in surgical procedures, as well as improved operational efficiency in the area of supplies management. As well, the provider saw an uptick in non-urgent procedures, as the backlog of patients who postponed visiting the hospital during COVID remains significant. So far this year, the company has completed three transactions, selling a hospital in San Jose to the County of Santa Clara and purchasing facilities in New Hampshire and Florida.