Since the March 2009 lows, stocks have outperformed when earnings have been hitting the tape and been held back outside of earnings seasons when macroeconomic news has dominated, according to Mark Tinker, a global portfolio manager at Axa Framlington in London.
“Periods between company earnings seasons have seen macro news take the lead as now, and this has led to underperformance relative to earnings or 'micro' months when fundamentals come to the fore again,” said Tinker in an interview with CNBC on Wednesday
“Backtesting monthly performance of the MSCI World since March 2009 shows that monthly performance during earnings months is 1.5 times that of other months,” he said.
Following the disappointing start to earnings season with Alcoa on Monday it remains to be seen if this trend will hold over the coming weeks and Tinker is questioning whether uncertainty created by higher prices should lead investors into defensive stocks.
“What are 'defensives' in an environment of rising input costs and more competitive environments globally? The traditional 'defensives' of consumer staples, and telecoms have failed to deliver,” Tinker said.
“Staples have been hit by the double whammy of rising input costs and increasing competition, especially in emerging markets. Previously names like Colgate and Procter & Gamble were seen as 'low risk' ways of playing global growth,” he said.
“However when we met the companies' management last year they gave us an insight into the 'battle for share' being fought in developing countries which would require higher sales and marketing expenditure and hence no positive operating leverage from sales to profits,” he said.
Telecoms in Tinker’s view cannot be seen as defensives given falling fixed line income and huge capital expenditure costs, so instead he is looking for high dividends.
“Interestingly though, one area of the market which doesn't fit the sector categories but could be seen as 'defensive' are high dividend paying companies. This is different to the 2003-2007 bull market and shows investors are willing to pay for high free cash generating companies that are paying out to shareholders,” he said.
Tinker likes Philip Morris which is up 12 percent this year, has strong pricing power and pays 4 percent on its dividend.
He also likes a stock that might not traditionally be seen as defensive, Victoria’s Secret.
“Limited Brands , the owner of Victoria's Secret is a case in point as the company today reported same store sales up 18 percent in Marchand is paying out a special dividend equivalent of a 16 percent yield this year,” said Tinker.