US productivity surge points to rise in corporate profits
US corporate productivity is increasing at the fastest rate for more than forty years, as companies focus on efficiency in challenging business conditions. The strong emphasis on cost-cutting means that profit margins have widened more than at any point since the Second World War.
According to Neil Rogan, Head of Global Equities at Gartmore, this paves the way for a sharp increase in corporate profitability in the months ahead.
"The near-collapse of the global financial system led companies to cut costs more aggressively than usual in a recession, but the total collapse in end-demand that we all feared never happened. Inventory management has been more effective than we expected, costs have been trimmed and productivity has increased. As global demand is picking up again, we see an environment in which we could have a profit explosion".
In fact, Mr Rogan believes that this could be the start of a growth bull market, albeit one characterised by periods of high volatility.
South Korea - whose economy is closely watched as a leading indicator - reported an exceptional 11% jump in manufacturing in September on an annualised basis, as the process of global restocking intensified. According to Neil, Asian air freight carriers, including Cathay Pacific, Air China and Eva Air of Taiwan are all seeing strong demand as retailers re-stock ahead of the busy Christmas period, with too little time left to use seabourne routes.
Gartmore's Global Focus Funds have exposure to companies that are expected to be beneficiaries of this trend, including the Taiwanese electronics producer Hon-Hai (tactical), the logistics company Fedex (tactical) and retailer Polo Ralph Lauren (strategic). Its analysts are seeking stocks with operational or financial leverage to the recovery, and have also added defensive stocks on conservative valuations with potential for growth in recent weeks.
The performance of Gartmore's Global Focus Fund and SICAV Global Focus Fund ranks in the top quartile relative to peers since inception. Performance has improved over the last six months. The positive earnings outlook and return to a market in which stock fundamentals are rewarded are encouraging for bottom-up stock pickers.