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by  Jeremy Richardson Nov 19, 2021

This month we started traveling again for meetings and while we were on the move again, the equity market remained unusually unmoved by macro headlines. Jeremy Richardson discusses the U.S. earnings season and why we are keeping a close eye on bond markets.

Watch time: 3 minutes 32 seconds

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Hello. This is Jeremy Richardson from the RBC Global Equity Team here with another monthly update and a change of location, and a sign, perhaps that things might be getting back to normal. I’m speaking to you from a hotel room somewhere in Denmark, looking forward to a number of face-to-face meetings as I get back out onto the road. Makes a pleasant change from videoconferencing for the last couple of years.

It’s a sign, I think, that the world is gradually getting back to normal, and I think that that more positive outlook is very much shared by the equity market at the moment. Remember in September, we saw quite a bit of volatility caused by concern at inflationary pressures that are both larger and longer lasting, in the words of the Chairman of the U.S. Federal Reserve, creating some concern that maybe we would get aggressive changes in the monetary policy.

Well, October arrived, and with that came the U.S. earnings season. Comes four times a year and always a good opportunity for investors to put the newspaper headlines to one side and instead focus on company fundamentals. And generally, I would say that those fundamentals have been pretty pleasing.

The earnings season got underway with the banks and the results were fairly robust. Notably, we saw write-backs of earn-off provisions, taken in the teeth of the pandemic out of an excess of caution, now no longer required. That got followed up with some really good results from many of the technology companies. And more recently, we’ve been seeing a lot of the consumer companies give us a bit of a window into what they’re seeing in terms of the health of the consumer.

And it looks as though consumers are getting back out there. We’re seeing services beginning to pick up. Strong figures in terms of like-for-likes or same-store sales, which I think perhaps are a positive omen as we head now towards the end of the calendar year and the arrival of gifting season. And I think a lot of the companies will be looking forward to this with a certain degree of anticipation, given that sort of quite positive momentum that is being seen in the short term.

Now before we get too carried away, though, as investors at the sort of encouraging mood music coming from the fundamental reports of companies, it’s probably worth keeping half an eye on what’s going on in the bond market. And there seems to be a difference of opinion. Whereas the equity market seems quite, I would say, sort of particularly volatile, it’s been greeted, many of these results, in a fairly benign way; we’re not seeing the same sort of stance coming from the bond market which seems to be characterized by a lot more volatility at the moment. And it may be the case that not both of these two asset classes can be right.

So, for equity investors, great to see the strong company fundamentals; always pleasant to be reminded of what great businesses can deliver. But at the same time, probably just worth keeping an eye on what’s going on elsewhere within capital markets, just in case some of that volatility could feed over into equity markets.

And so again, this is where we end up with that marriage between the alpha generation coming from strong company fundamentals with the need for alpha capture, which comes from risk management in order to be able to face off to any unexpected volatility.

I hope that’s been of interest, and I look forward to catching up with you again soon.

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Original publication date November 16, 2021