Each week, a professional investor tells us where he’d put his money. This week, Mark Whitehead of the Securities Trust of Scotland selects three high-quality firms that can keep growing when central banks raise interest rates.
The most recent bull market has already been one of the longest in history, lasting for almost nine years. Until this week, it hadn’t shown any real signs of running out of steam. Indeed, 2017 was the first time in the 30-year history of the MSCI AC World index that it posted a gain in every month of a calendar year.
There are reasons to be cautiously optimistic about the year ahead, as synchronised global growth looks set to continue and corporations appear confident. However, the key question is whether global growth (and corporate profits) will be sustainable as the central banks wind down quantitative easing.
We believe this year will see strong economic growth, which should support profits. Despite rising interest rates there is still stimulus to support risk assets. What’s more, global earnings growth revisions have made an explosive start to 2018 – the strongest, in fact, for five years. We need strong earnings to underpin equity markets – particularly the US, which continues to look expensive.
We will be watching equity markets closely as investors digest rate increases and the gradual reduction in central-bank support. I believe that high-quality, dividend-paying equities with sustainable growth will remain one of the most attractive avenues for investors as we make the transition into a world with less accommodative monetary policies. Taking a global approach is the best way to identify these stocks.
Well placed to grow
For instance, Manulife (Toronto: MFC), the Canadian insurance and financial services multinational, looks well placed to grow its Asian and wealth-management operations. The firm’s balance-sheet quality is improving as it reduces exposure to capital-intensive legacy-product lines, thus freeing up capital to invest in other areas, including Asia. This region is a key growth market for Manulife due to under-penetration of financial products.
Profit from rising energy demand
Meanwhile, in a very different sector, we see the French industrial conglomerate Schneider Electric (Paris: SU) as another high-quality stock with sustainable dividend-yielding characteristics. We believe the company’s organic revenue growth is improving, driven by the better economic environment, as well as new technologies. Schneider is a leader in the management and automation of energy, and energy demand is growing as the economy uses more and more data. This stronger demand growth, combined with operational leverage (see page 10), should prove positive for sustainable dividend growth.
A solid dividend yield
Elsewhere, banking giant HSBC (LSE: HSBA) offers a high, but safe dividend yield. We believe the company is close to the end of its restructuring and cost programmes and has transformed itself following the global financial crisis of 2007-2009, leaving it with a much stronger capital position and leaner business model. The bank also carries a substantial amount of short-term liabilities or customer deposits in US dollars. That will be beneficial as US interest rates rise further, as this will drive stronger deposit returns, and help to drive future dividend growth.