This reporting season was a bit of a mixed bag, with the miners the big winners thanks to the surprise strength of commodity prices as normalised inflation and growth levels at least showed signs of returning to the world economy.
As a result shares in the likes of BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and South32 Ltd (ASX: S32) have all enjoyed strong years.
Looking ahead, with U.S. growth just being revised upward to 3% over the quarter to June 30 2017, it's possible that inflation and commodity prices remain strong over the year ahead. However, that's largely priced into the share prices of the big miners for now, with most of the risk to the downside given China's unpredictable demand for commodities.
If you want to make money and play the themes of reflation and better growth in the U.S. or Europe, then asset manager and investment bank Macquarie Group Ltd (ASX: MQG) looks a better bet on its current valuation.
Since 2007, and including the GFC, Macquarie has delivered a total shareholder return of 97% compared to a 50% TSR from the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO).
This is partly because it has paid a big dividend (around 5.6% on a trailing basis), while delivering 5 consecutive years of profit and dividend growth.
Part of the reason behind Macquarie's improved performance is its post-GFC pivot into the asset management space where its business activities now represent around 70% of profits.
Its asset management businesses include the opaque asset leasing, lending, and debt trading Corporate & Asset Finance business, alongside its traditional asset management business, and banking businesses.
These are complex businesses, but generally offer recurring fee streams (at varying degrees of risk) throughout the economic cycle and mean Macquarie's stock price is (in theory) less vulnerable to the wild swings associated with capital markets.
Its market-facing businesses that include its sell-side brokerages and deal-making capital markets advisory business are still leveraged to trading volumes, confidence, and economic activity. In FY 2017 these businesses grew profit 12% on the prior year and could deliver another reasonable year of growth.
Macquarie also acquired a multi-lateral development bank in the UK's Green Investment Bank in FY17 for around A$4.4 billion in a coup that will instantly add around $7 billion in assets under management, with another A$5 billion or so to be added over the three years ahead. I expect Macquarie will also crank the profitability of this business, while now owning an asset well positioned to deliver long-term growth.
The bank also offers overseas diversification away from an Australian economy still leveraged to commodity prices and overseas capital flows supporting overvalued residential property markets.
Of course Macquarie carries substantial risks, including the toughening regulatory environment, too much global debt and the potential for another market crash being triggered by a black swan event such as a war on the Korean peninsula. As such it should only represent part of a balanced investment portfolio. Another looming profit hit to it involves the appreciating Australian dollar if the commodity bull run continues for example.
Despite the rising Australian dollar its valuation looks reasonable, with the bank forecasting FY 2018's result to be "broadly in line" with FY 2017's result of $6.42 in earnings per share.
That puts it on just over 13x trailing earnings at $85.30 with a good chance it can deliver low-to-mid single digit compound earnings growth over the decade ahead. As such I expect it will continue to beat the returns of the S&P ASX/ 200 from here.
