Last week in my Citywire column – HERE – I mentioned that I thought that one of the most interesting investment ideas out there at the moment was to invest in the plumbers behind the modern financial and investment system. I’d call them the Basis Point outfits as they all take a few (some many times more) basis points from the financial system by providing essential information or data. The most obvious candidates are the index providers who sit at the nexus of modern portfolio management. I don’t need to remind readers that as passive funds have grown in importance, these data vendors have picked up huge revenue streams, partly because of the depth of their data but also because they own trusted brands which institutional investors insist on. I’ve also added Visa and Mastercard who clearly act as the chief plumbers for the new global financial payment system.
The screen grab below from Sharepad shows my curated list of seven providers with a benchmark for comparison – the S&P 500. My initial list of Basis Points Plumbers consists of the following: Mastercard, Visa, MSCI, S&P Global, Moody’s and Morningstar. On virtually every performance yardstick from six months to six years, these hugely lucrative businesses have consistently beaten the S&P 500, as you;d expect from such gatekeepers (or rentiers as some might allege). I don’t defend all their practises but its hard not to think that these businesses are a brilliant long term bet. I simply cannot see the passive revolution reversing any time soon and I’d also suspect that Mastercard and Visa are not about to lose their advantaged perch in the new, fintech enabled, global financial system. I’ll probably start putting some money to work on these businesses.
One observation – these businesses have turned out some remarkable six months numbers although there’s much greater variance over the last few months.
Earnings Cliff approaches
A quick update on where we are with earnings in Europe and globally. First off we have the European equities team at Morgan Stanley …
“EPS growth rates arguably provide the most timely steer in terms of where pain is being most felt. Current results imply a material EPS contraction of ~30% YoY at the index level, with expectations for 2Q already down to -40% YoY. At the sector level we note that Financials, Commodities & Industrials are trending down the most in YoY terms with Health Care names proving the most resilient.”
Next up the global quant team at SocGen, on global EPS trends (and valuations)……
“We are seeing almost 200bp cuts from 2020 global EPS expectations every week – and yes near-term forecasts are obviously seeing the biggest hit, with Q2 sharply down in April, but 2021 has also seen a 22% cut. At the start of this year, end 2021 EPS forecasts were expected to be 20% higher than the then end 2019 estimates; based on the latest estimates end 2021 forecasts have EPS down only a couple of percent on 2019, and that’s after a rapid recovery in profits expected that year. The most remarkable number though is the valuations the market is putting put on these 2021 earnings, which at nearly 16x worldwide is a level rarely exceeded since the Tech-bubble.”