ILLUMINATION Equity strategy and market outlook June 2021 Published by Edison Investment Research Contents Global perspectives 2 Company profiles 7 Edison dividend list 66 Stock coverage 67 Prices at 18 June 2021 Published 24 June 2021 US$/£ exchange rate: 0.7099 NOK/£ exchange rate: 0.0846 €/£ exchange rate: 0.8593 CHF/£ exchange rate: 0.7858 C$/£ exchange rate: 0.5833 ZAR/£ exchange rate: 0.0514 A$/£ exchange rate: 0.5450 HUF/£ exchange rate: 0.0025 NZ$/£ exchange rate: 0.5076 KZT/£ exchange rate: 0017 SEK/£ exchange rate: 0.0849 JPY/£ exchange rate: 0.0065 Welcome to the June edition of Edison Insight. We now have c 400 companies under coverage, of which 117 are profiled in this edition. Healthcare companies are covered separately in Edison Healthcare Insight. Click here to view the latest edition. This month we open with a strategy piece by Alastair George, who believes that last week, the US Fed tipped its hand in respect of its tolerance for above-target inflation and its reaction function to the strong recovery in US GDP. In the days following the Fed meeting there has been a minor sell-off in global equity markets as Fed governors try to calibrate their new, more hawkish message. The advent of vaccines means that the COVID-19 pandemic is starting to be viewed by markets as a healthcare problem that can be managed, rather than an economic crisis. Yet when institutional fund managers return to their offices after the summer, the headwinds of tighter monetary policy and shrinking COVID- 19 fiscal support in 2022 will be coming into view. By 2022 fiscal spending is forecast to contract in advanced economies, according to IMF projections. To maintain the growth momentum, fiscal spending will have to be replaced by private sector spending and investment. We remain neutral on equities. The outlook is balanced between a degree of overvaluation for developed markets in aggregate against the prospect of another year of very low interest rates and ongoing positive earnings momentum. As each month elapses however, the normalisation of monetary policy draws closer, most recently evidenced by the hawkish turn in Fed policy. This month we have added BluGlass and Filtronic to the company profiles. Readers wishing for more detail should visit our website, where reports are freely available for download (www.edisongroup.com). All profit and earnings figures shown are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison is a registered investment adviser regulated by the state of New York. We welcome any comments/suggestions our readers may have. Neil Shah Director of research Edison Insight | 24 June 2021 1 Global perspectives: US Fed tips hand Analyst Last week, the US Fed tipped its hand in respect of its tolerance for above- Alastair George target inflation and its reaction function to the strong recovery in US GDP. In +44 (0)20 3077 5700 the days following the Fed meeting there has been a minor sell-off in global equity [email protected] markets as Fed governors try to calibrate their new more hawkish message. At least until the recent change of tone from the US Fed, investors seemed to be ignoring the traditional maxim to sell – or at least reduce risk – at the sound of trumpets. The advent of vaccines means that the COVID-19 pandemic is starting to be viewed by markets as a healthcare problem that can be managed, rather than an economic crisis. Yet when institutional fund managers return to their offices after the summer, the headwinds of tighter monetary policy and shrinking COVID-19 fiscal support in 2022 will be coming into view. Fiscal profligacy forecast to be reined in during 2022. By 2022 fiscal spending is forecast to contract in advanced economies, according to IMF projections. To maintain the growth momentum fiscal spending will have to be replaced by private sector spending and investment, which is not necessarily a seamless transition. We remain neutral on equities. The outlook is balanced between a degree of overvaluation for developed markets in aggregate against the prospect of another year of very low interest rates and ongoing positive earnings momentum. As each month elapses however, the normalisation of monetary policy draws closer, most recently evidenced by the hawkish turn in Fed policy. Edison Insight | 24 June 2021 2 Floodgates closing Last week, the US Fed tipped its hand in respect of its tolerance for above-target inflation and its reaction function to the strong recovery in US GDP. We believed this moment was always due at some point during H221 – and only last month we wrote about the likely closing of the monetary floodgates as the global economic recovery gathered pace. In the ensuing days following the Fed meeting there has been a minor sell-off in global equity markets as Fed governors try to calibrate the new message. Speaking to the press following the Federal Open Market Committee (FOMC) meeting, Fed Chair Powell retired the phrase ‘talking about talking about’ tapering US quantitative easing. The date of the tapering of the programme is now apparently under active discussion. Within the Fed’s Summary of Economic Projections, the date of lift-off of US interest rates has been brought forward to 2023. The tone of the Fed’s comments was relatively hawkish for investors accustomed to soothing noises from the institution, at least compared to since the start of the pandemic. In addition, the Fed’s inflation forecasts for 2021 have risen markedly, reflecting the surge in prices earlier in the year and forecasts for US growth have also risen modestly. These provide the impetus behind the change in outlook for the US Fed, which drove a brief risk-off period for markets and a 2% rise in the trade-weighted US dollar index. Exhibit 1: FOMC ‘dot plot’ now indicates 2023 lift-off in US rates 0.7 0.6 0.5 0.4 plot projection % projection plot - 0.3 0.2 Median dot Median 0.1 0.0 2022 2023 March meeting June meeting Source: Federal Open Market Committee We believe however that investors should not over-react to a development that should have been anticipated. We also note that the US Fed’s new raised inflation forecasts for 2021 should accommodate the relatively high inflation readings expected in coming months, lowering the likelihood of a further increase in the pace of policy tightening. This implies that gradualism remains firmly on the policy agenda. In our view, the recent policy signal is not that the Fed is in now panic mode or ‘behind the curve’, nor that US rates will be raised pre-emptively or sharply to counter a short-term inflation threat. Instead, the slack on the chains on the floodgate doors has been taken up, positioning the Fed to react to faster than expected growth with higher rates, but it still retains the ability to pause, should economic growth ebb in the second half of the year. Both in the United States and other developed markets financial conditions remain loose and we note that 10-year yields, which are more relevant for equity valuations, were effectively unchanged on the US news. Still favouring value sectors At least until the recent change of tone from the US Fed, investors seemed to be ignoring the traditional maxim to sell – or at least reduce risk – at the sound of trumpets. The advent of vaccines means that the COVID-19 pandemic is now starting to be viewed by markets as a healthcare Edison Insight | 24 June 2021 3 problem that can be managed, rather than an economic crisis. Equity markets have risen strongly over the past six months and corporate credit spreads have shrunk to close to 20-year lows. Yet when institutional fund managers return to their offices after the summer, the headwinds of tighter monetary policy and shrinking COVID-19 fiscal support in 2022 will be coming into view. We believe the period of above-average gains for risk assets such as equities and corporate credit may be behind us as risk premiums for equities and credit have more than recovered their COVID- 19 induced increase. For example, equity market price/book valuations are now in excess of long- term norms and the rate of upward earnings revisions has faded from the heady levels of earlier in the year. Exhibit 2: Equity market valuations significantly ahead of long-term averages except for the UK 30% 20% 10% 0% -10% -20% -30% Premium to to average P/bk Premium -40% 2013 2014 2015 2016 2017 2018 2019 2020 Europe ex UK US UK Source: Refinitiv, Edison Investment Research calculations. Note: Median FY2 price/book. Normalisation of monetary and fiscal policy on the horizon for 2022 Diminishing economic uncertainty from COVID-19 should give rise to expectations of a normalisation of monetary and fiscal policy during 2022, absent the advent of a COVID variant that can escape current vaccines and derail the progress made in relaxing social restrictions. These expectations will have been reinforced recently with the disclosure that the Fed may have reached the limit of its appetite to stimulate the US economy, given the extent of the US recovery.