Ashley Pittard: The most forecast recession ever has been delayed again

The long-forecast US recession has been delayed once again, says ASHLEY PITTARD, who heads up Pendal’s Global Equities investment team

• Capex spending to boost economy
• Tech stocks selection critical
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

BANK of America last week became the first big Wall Street bank to reverse its recession call.

Are they right?

“Given the strong capital expenditure numbers we are seeing in the US June quarter earnings season, it’s going to be very hard for the US to have a recession this year,” says Ashley Pittard, who heads up Pendal’s global equities investment team.

“Over the last ten years, US companies under-invested. Since the global financial crisis, only 38c in every dollar that was generated from operations or borrowed, was invested.

“Before the global financial crisis it was 53c.”

Instead, corporate America has spent more on share buybacks, notwithstanding the very low interest rates during the period and a pretty good economy, Pittard says.

But this US earnings season, corporate America looks to be taking a different view.

“What you are seeing in the earnings numbers, and what you have seen the entire year, is that capital expenditure is accelerating – 15 per cent in the current quarter, year-on-year, and 14 per cent in the first quarter.

“It’s very hard to have a recession when you capital expenditure is so high,” Pittard says.

The key reason for the boost in capex is re-shoring of operations, post-Covid in a more fraught geo-political environment.

“A couple of years ago, no-one mentioned re-shoring. This earnings season, mentions have gone exponential,” he says.

That’s the headline outcome of Wall Street’s earnings season.

US earnings are beating estimates

In terms of numbers, earnings have beaten estimates by about four per cent, and by one per cent on sales, Pittard says.

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“We are seeing better margins.

“The ‘beats’ are about the historical average, so it’s been a nice earnings season.

“Where you’ve seen most headwinds is in energy, year-on-year, and that’s because prices are lower.

“Materials have come back due to softness in China. And the low-end semi-conductor sector has been weak, cutting their guidance and outlining high inventory levels.”

The outlook for tech

In terms of the Wall Street technology companies, which have outperformed for much of this calendar year, Pittard says investors need to be selective.

“One of the core themes in our concentrated share fund since the beginning of the year was keep the COVID losers but be selective on 2022 losers. And 2022 losers were mostly tech stocks,” he says.

Ashley’s Pendal Concentrated Global Share fund has substantial positions in Amazon, Google, Netflix, Meta and Warner Bros. Discovery.  

“We have been selective. We don’t own Apple, Microsoft, Nvidia and Tesla.

“With Apple, Microsoft and Nvidia, it comes down to valuation.

In the case of Apple and Microsoft, they are trading on a price-to-earnings multiple of 33 times. If they can’t get sustainable growth, then that PE is coming down.

“In Apple’s case, the only thing that grew last quarter was their service business.”

Some of the other tech stocks, such as Meta, Amazon and Google, also have the ability to lower costs, Pittard says.

“They are the businesses which have a better skew towards where the growth is, particularly Artificial Intelligence.”

About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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