Stocktake: CRH’s executive pay under scrutiny

Bull market may continue; gains for emerging markets; beware round figures

The seven-year bull market has hung on to become the second-longest rally in S&P 500 history

CRH’s executive pay under scrutiny

The so-called "shareholder spring" continues, with CRH one of many FTSE companies to come under scrutiny last week over executive pay packages.

CRH chief executive Albert Manifold could earn total bonuses of up to 590 per cent of his €1.4 million annual salary this year, netting a bonus pot of up to €9.65 million.

Last Thursday, more than 40 per cent of CRH shareholders voted to reject the pay deal, with investor group Institutional Shareholder Services (ISS) drily noting performance targets had "not been made significantly more challenging than what applied previously".


At Dublin-based pharmaceutical giant Shire, almost half of shareholders – 49.5 per cent – voted against pay hikes, while 72 per cent of shareholders at FTSE 250 firm Weir voted down its pay policy.

Executive pay packages have become a political football in recent years, with politicians and regulators increasingly less accepting of pay deals that appear abnormal to those outside the corporate bubble.

Shareholders should be similarly frustrated; evidence to indicate that outsized financial incentives actually yield improved company performance is thin on the ground.

The bull keeps on keeping on

After surviving a tumultuous beginning to this year, the seven-year bull market has hung on to become the second-longest rally in S&P 500 history.

Last Thursday saw the rally surpass the 1949-56 bull market in duration, if not in strength – the 215 per cent gain means it ranks fifth in terms of percentage gains. Bulls do not necessarily die of old age, as evidenced by the 13-year party that finally ended when the dotcom bubble burst in 2000.

Besides, stocks fell 19.4 per cent in 2011, just shy of the technical definition of a bear market; the current rally looks less aged if one dates its beginning to that period.

The obvious obstacle is not age but valuation. The world economy isn't as bad as feared, JPMorgan said last week, but valuations comparable to previous market peaks mean there is less of a cushion if the unexpected happens, making for "edgier" markets.

Valuations will appear less daunting if corporate earnings improve. If earnings turn around, this ageing bull may make it into 2017 and beyond.

Gains for emerging markets?

Beaten-down assets such as commodities and emerging markets (EM) have surged this year. US money manager Mebane Faber says that far from being a dead cat bounce, they may be in the early stages of a big multi-year rally.

Faber’s backtests reveal national stock markets suffering three consecutive annual declines gained an average of 56 per cent over the following two years. For sectors, three down years were followed by average two-year gains of 60 per cent. Returns get even bigger if one holds on for three- and five-year periods.

“A basic rule of thumb is that if the asset is down two, three, four, and five years in a row, you can expect future two-year total returns of 40 per cent, 60 per cent, 80 per cent, and 100 per cent”, says Faber. Detested assets in multi-year downtrends – EM, commodities, coal miners, the yen – have all soared, but history indicates “the rubber band has been so stretched there’s still major gains ahead.”

Be wary of round numbers

Analysts and shareholders cheer when a company announces it has cleared €1 billion in sales for the first time, but a new study suggests they should be wary.

The study, which examined 65 years of US sales figures, found firms are much more likely to report sales slightly above rather than below round numbers. The effect, which is especially obvious at eye-catching numbers like $1 billion and among firms under pressure to report strong growth, generates extra media coverage for the companies.

Such manipulation can’t be sustained: sales growth tends to quickly taper off, indicating “lenders, investors, auditors, and regulators should apply an extra degree of scepticism” when companies creep past numerical milestones.

Buying into momentum story

Markets have surged over the past two months; does it pay to fade such moves or to jump on board?

The latter, judging by Nautilus Research data. Since 1960, there have been 27 periods where gains were comparable to those registered over the last 50 days. Three months later, the S&P 500 was higher on 24 occasions, with average gains over twice as high as the average three-month period. Six months later, gains averaged 7.04 per cent, compared to average six-month gains of 3.89 per cent. A year later, stocks were higher on 21 occasions; average gains of 11.94 per cent were again well above historical norms.

Investors can argue about the market fundamentals until the cows come home, but momentum suggests higher prices lie ahead.