Hello and welcome to the download. I’m your host, Dave Richardson. And today I’m joined again by our co-head of North American Equities, Stu Kedwell. Stu, welcome to the podcast.
Thanks for having me.
So, if we’re looking at perhaps the most important thing we can cover with you today, as we move into the second half of April, we’re going to start to get first quarter reports from lots of companies. Already we’re seeing, this morning, some reports from some of the big banks in the U.S. As an investment manager, what are the things you’re going to be looking for, as these reports come out, to influence the decisions you’re making around portfolios?
That’s a great question. This morning we had J.P. Morgan and Wells Fargo starting things off. And I think where most investors’ heads are at, first of all, in this first quarter, you had two months out of three where business was still relatively intact. So these results are very backward looking. Not a ton of clues from what’s actually reported. And even going forward, we know that the economic contraction is going to be very sharp. I think over a quarter of the S&P 500 is already rescinded any guidance that they gave about the year going forward. So, from an earnings standpoint, you’re not making a lot of decisions based on what is reported now or even what the near term looks like. What you want to really watch for, when you listen to these companies and follow up with them afterwards is: what does business look like when things return to normal? What does the balance sheet look like? Do they have plenty of liquidity to get them through this tougher, more challenging period of time? Often you want to find out: businesses will have part of management working on defense, — how to shore up the business in its current form — and they’ll have another part of the business working on offense — how to find new opportunities, how to reorient some of their supply channels, how to maximize revenue, in what is still going to be a pretty challenging environment. So you’re really sitting down and trying to figure out those good management teams, how are they going to run the business through the next twelve or eighteen months, which are still likely going to be quite challenging. And then you want to get that feeling for what the earnings’ power is going to be when things gradually come back to normal. And that can give you a real feeling as to what the share price could look down the road.
So, Stu, do you think that some of these announcements, either better than expected or worse than expected, — and as you say the first two months you categorize as more normal, and it’s really March where you’re seeing the impact of the virus and all the measures to contain the virus are going to have an impact — but do you think there’s the potential for these to move markets dramatically one way or another?
I don’t think they’re likely to move markets dramatically because of a couple of things. The central banks have been very accommodating. Even since our call last Tuesday, we saw more accommodation from the Federal Reserve. So there are a lot of tools working in the background to avoid the financial markets causing additional hardship to the economy. So that’s the first thing. The second thing is, everyone knows that the economic shock is going to be quite severe, so for companies reporting earnings one side or the other, it’s not really as much of a surprise as it may have been in more calm seas. What will be a major focus is around those balance sheet and liquidity metrics. So if someone surprises us on a liquidity measure, that will likely have a little bit more of a negative impact. But as far as income statement impacts are concerned, I don’t expect big surprises to have an impact the way they might have.
All right, Stu, that’s a great synopsis of some of the things that investors can look for as they’re seeing these quarterly reports come out. And we’ll have, I guess, more of them to talk about next week when we connect. Stu, thanks for your time, as always.
Great. Thanks, Dave. And thanks everyone for listening.