The stock in focus this month is Macquarie Group (MQG).  Once the market darling, MQG has had a difficult 5 years since the departure of former CEO Allan Moss.  The Group was at ground zero of the financial crisis and the subsequent environment of non-existent deal flow and increased regulation has meant that the company’s market dependant businesses have not significantly contributed to profit for a number of years.  At times the Macquarie business model itself has been queried and the stock languished around its book value as investors waited to see if the bank could reinvent itself as it had in previous market downturns.

Over the last 18 months, as the worst of the storm clouds have started to lift from the global financial environment, the MQG share price has staged a strong recovery as earnings have stabilised and we have seen the emergence of new business lines, particularly the Funds Management business, which provides a growing stream of annuity style earnings.  MQG has also made a number of purchases of US financial services businesses in an attempt to gain a foothold in the massive US market and early signs from these businesses are encouraging.

Despite the market upheavals and ongoing headwinds MQG maintained profitability throughout the GFC period; however a conservative approach to maintaining excess capital on their balance sheet has negatively impacted their return on equity in recent years.  As the need for capital abates we see this capital being returned to shareholders in ensuing years, most probably in the form of an increased payout ratio underwriting higher dividends.

The big driver for growth going forward for MQG is in a strong recovery in global capital markets activity, which will lead to an increase in traditional investment banking businesses that have struggled in the last 5 years.  This added to continued growth in the annuity style businesses developed in recent times means that MQG has a great degree of leverage to an increasingly improving global economic outlook and why with a price target of $49 and a forecast yield of 5.7%, we see room for an extension of the recent rallies from the lows and maintain the stock across portfolios.