Monthly video update – May 2018

US Treasury yields breaching the 3% mark and a closer look at research into cancer treatment. Mark Whitehead, Head of Income looks at what interested him in April.

14 May 2018

Mark Whitehead with Global Equity Income update Play Play Video
Mark Whitehead GIVES AN UPDATE on Securities Trust - May 2018

What caught your eye this month?

  • The US 10-year Treasury went past the 3% barrier for the first time since 2014, heralding a period of higher inflation. This was driven by rising US wages, freight and raw materials.
  • We are hearing concerns about input-cost inflation from some companies – which suggests pressure on margins.
  • These inflationary pressures also mean the Federal Reserve remains on track for another three interest-rate hikes this year.
  • However, we believe there is opportunity for investors to benefit from commodity inflation, evident in the move higher in oil prices.
  • Energy companies have been strong performers in April. Those energy names in the portfolio produce oil at the lower end of the cost curve and, as oil prices rise, they are able to generate highly attractive cash flows, supporting high dividends and enabling strong growth.
  • Chevron, for example, recently reported volume growth and better prices, leading to much improved cash flow from operations.

What currently interests you?

  • One area of current interest for us is in the healthcare sector, is that of immunotherapy –treatment which uses the body’s own natural defenses to fight cancer.
  • US pharmaceutical Merck recently reported impressive data from full trials of its drug Keytruda, showing improved prognosis in some lung cancer patients.
  • Those trials build on the company’s extensive research and development and we could see Keytruda becoming the foundational drug in the immune-oncology area for the next decade. For the company this could mean sales and profits outpacing consensus expectations.

What is the outlook for the next few months?

  • Markets now appear to be less concerned with higher bond yields and some of the geopolitical tensions, for example concerning North Korea, Syria and Russia, seem to be dissipating.
  • Alongside this, equity markets look better value than they did just a few months ago and we are seeing some strong earnings momentum for the first quarter, which is supportive.