Focusing on Quality: Macro conditions favor strong franchises; 12 changes to Focus List
2016 themes favor GS SUSTAIN strategy
In recent weeks our US & European equity strategists have shared their 2016 outlook, and two themes support GS SUSTAIN-like firms: (1) a more extended US rate hike cycle than what the market expects will favor companies with high returns on capital/stronger balance sheets; (2) challenging macro conditions and full valuations lead us to prefer companies that can create shareholder value through access to faster growing end markets (or market niches through pie shifts).
Highly competitive environment to continue
We believe returns on capital will continue to be pressured for the average company due to: (1) more competition funded by a low cost of capital; (2) competition that benefits from production in lower cost markets or from falling currencies; and (3) new, tech-enabled business models that are targeting attractive profit pools. With this macro
backdrop and highly competitive operating environment set to continue, we expect companies that have strong franchises and differentiated products will outperform.
7 additions, 5 removals to the Focus List
With this report we make 12 changes to the GS SUSTAIN Focus List: in Banks we add Svenska Handelsbanken, Signature Bank, US Bancorp, and remove BBVA and HSBC; in Industrials we add Safran, Ryanair and remove Boeing, Cummins, and Rotork; in Internet we add Alphabet and LinkedIn. We made these changes as we integrate
new Competitive Positioning frameworks into GS SUSTAIN for Aerospace & Defense, Refiners, and Regional Banks, and as we refresh our industry positioning data for Internet companies.
Focus List value screen performing well
The performance of the Focus List has been flat relative to the MSCI AC World Index over the past four years, but during this period our valuation screen for “near term value” within Focus List firms has generated 7.3% p.a. outperformance. We believe that this shows that while equity market dynamics do not always favor a valuation agnostic GS SUSTAIN strategy, the combination of quality and value can continue to do well.