Simon Edelsten, 16 December 2019
“Ours is a cautious approach to investing. This has led us to reduce our exposure to the most fashionable stocks in recent years: their valuations have become stretched.”
Bull
- Global economic growth should re-accelerate in 2020.
- Political concerns in developed markets are expected to ease.
- Low bond yields are pushing income-seekers towards equities.
Bear
- Emerging markets could be held back by political instability.
- Valuations of some of the most fashionable stocks look rich.
- Technological change continues to threaten some industries.
A good decade for global equities
It has been a good decade for equity investors. Since the global financial crisis of 2008, global stockmarkets have risen dramatically.
MSCI AC World: Cumulative return vs return by year
Source: Refinitiv Datastream as at 29 November 2019.
Many investors in global equities have made large capital gains and would like to protect them. Yet while we manage our fund with this preference in mind, that does not mean we believe the bull market in equities is about to end. With little sign of inflation in Europe and Japan, bond yields should remain very low. So – however reluctantly – investors may continue to look to equities for income.
The expansion that began in 2009 should continue
While 2019 saw a slowdown in global growth, we believe 2020 will bring a slight reacceleration. Goldman Sachs expect global growth to accelerate from 3.1% in 2019 to 3.4% in 2020 – and to 3.6% the year after, all with inflation remaining quiescent at below 3%1.
The political concerns that have hung over markets this year may ease
By this time next year, the US will have (re-)elected a president. After four years of Mr Trump, Wall Street might welcome a moderate Democratic candidate, should one emerge.
The new European Parliament will have launched a fresh range of policies, probably including some element of fiscal stimulus. We would also hope for some progress to be made on Brexit.
We prefer developed markets
While politics should become less of a concern in developed markets, political instability may well hang over some emerging markets. Areas of concern include Hong Kong/China, Chile, Argentina, Bolivia and South Africa.
We are not alone in seeing developed markets as being more secure areas in which to invest. This has led to a large volume of savings funnelled into a relatively short list of well-known stocks, driving some to rather high valuation multiples. It is the most richly valued stocks that fall hardest in any correction.
Our approach – Hasten slowly…
Ours is a cautious approach to investing. This has led us to reduce the funds’ exposure to the most fashionable growth stocks in recent years as their valuations have – in our view – become stretched.
Overall, while the share prices of our holdings have generally risen, that has been matched by a rise in their underlying cashflows. So – in contrast to the wider market – their valuation multiples have not increased.
Avoiding ‘deep value’
At the same time as being cautious on the most fashionable growth stocks, we are avoiding ‘deep value’ stocks, many of which are in sectors that lack barriers to entry or are threatened by technological change (like old-fashioned retailers, oil and gas companies or carmakers). We believe they present more risk than opportunity.
Where we find growth
Roughly half of our portfolio is invested in longer-term growth areas. We have investments in companies that design semiconductors for artificial intelligence and 5G telecoms. We have investments in cloud computing companies, which should benefit from further growth in data traffic.
The other half of the portfolio is invested in areas that grow more slowly but have good defensive qualities. These include affordable healthcare companies, windfarm developers, drug companies developing successful modern cancer immunotherapies and even forestry businesses.
1Source: Goldman Sachs Economics Research: ttps://www.goldmansachs.com/insights/pages/global-outlook-2020-f/report.pdf Published 20 November 2019.
