Is it time to get defensive?
Equities around the world have enjoyed an incredibly strong bounce back since the Covid-19 crash,...
Despite notching up returns of more than 20%^, last year was anything but smooth sailing for global equities as the impact of geopolitical uncertainty, sharp changes in monetary policy and persistently low interest rates continued to weigh heavily on markets.
However, having entered a new decade it seems we could be set for some stability in markets – well, at least that’s according to the International Monetary Fund’s latest World Economic Outlook*.
The organisation believes we are set for growth of 3.3% in 2020 (up marginally from 2.9% in 2019, but slightly lower than the 3.4% it estimates in October 2019). The IMF believes the events in the final quarter of last year could be a turning point for the global economy, highlighting that “market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favourable news on US-China trade negotiations, and diminished fears of a no-deal Brexit.”*
We are by no means out of the woods – particularly when it comes to geopolitics, with the US and Iran at loggerheads and the intensifying social unrest across many countries. However, if we are entering a period of stabilisation how can investors best tap into the trend?
Emerging economies have hit a significant milestone in 2020, with economic growth (as measured by gross domestic product or GDP) for Asia set to pass the rest of the world combined**. By 2030 as much as 60% of global GDP will come from Asia**. This year, the IMF projects emerging markets will grow by 4.4%, compared to only 1.6%* for developed economies. Those looking to invest might consider the Magna Emerging Markets Dividend fund. Manager Ian Simmons searches for companies that are able to pay high dividends in the short term, but are also able to grow those dividends over the long term. These are often in niche areas, which may be overlooked by less well-resourced teams. The best ideas are then used to create a balanced portfolio.
Within emerging markets, both China and India had their challenges in 2019. China has had to deal with the trade stand-off with the United States, as well as its own slowdown in growth, while India has seen domestic demand slow more sharply than expected amid stress in the non-bank financial sector and a decline in credit growth. Both countries have seen growth slow in 2019, particularly in India’s case where it dropped to 4.8% (vs. 6.8% in 2018)*. However, both countries are still expected to be the leading growth drivers in 2020, with China projected to have growth of 6% and India 5.8%*.
Both China and India are long-term investment stories, with structural trends like the growing consumer and urbanisation supporting them. If you want to invest in China you may want to consider the likes of the First State Greater China Growth fund, managed by Martin Lau and Helen Chen. The fund has an absolute return mindset and invests in quality companies for the long term. It looks for sensible company management and businesses that have both sustainable and predictable growth.
By contrast, investors in India may look to an “all weather” offering, like the Goldman Sachs India Equity Portfolio. The fund has a bottom-up approach and the portfolio has a bias towards growth companies. That said, manager Hiren Dasani prefers companies that are trading at substantial discounts to their intrinsic value, making valuation is an important part of his process.
Regardless of your political leanings, the result of the Christmas General Election has been a welcome boost to the UK economy in the sense that it finally offers some political stability for the first time in almost four years. ‘Get Brexit done’ was the slogan which cut through the noise and resonated with voters. The lack of certainty surrounding Brexit has almost brought the UK to an economic standstill, with little or no investment from businesses, individuals and foreign investors. This has begun to change given the chances of a no Brexit scenario have fallen, but the UK is still cheap compared with developed other markets. The IMF believes the UK will grow by 1.4% in 2020 and 1.5% in 2021* – not exactly strong levels of growth, but it is the lack of investment which has opened up an opportunity for investors.
Investors may like to consider ‘recovery’ funds in this scenario. These types of funds have had to be patient given the challenges the UK has faced. But patience may reward, even if a Brexit resolution takes a little longer than some may hope given the Election result. Products to consider include the Fidelity Special Values trust, managed by Alex Wright, which specifically targets undervalued companies – while also retaining a focus on capital preservation. Another of note is Alastair Mundy’s Investec UK Special Situations fund, which also targets value.
UK small caps may also provide opportunities in this scenario, with the likes of the Marlborough Special Situations or Liontrust UK Smaller Companies both solid options with exceptionally strong long-term track records.
Europe has been the most maligned of investment markets for some time, but should also benefit from the no-deal Brexit scenario diminishing. Like the UK, it is also a market which offers value opportunities. Growth is also expected to pick up slightly in 2020 (1.3%)* for the Euro Area, according to the IMF. Europe has big global brand names based on the continent – something which is often overlooked. That is very much a stock-pickers paradise, so finding an experienced manager is important to tap into those opportunities. There is also an argument that Europe is in a sweet spot given that there is wage growth, low unemployment and money supply, while inflation is not at worrying levels.
James Sym’s Schroder European Alpha Income fund is one to consider for those looking to tap into Europe. His pragmatic style means he is not wedded to a particular investment approach. The 30-50 stock portfolio favours stock ideas which have a lot of potential to do well but are less likely to fall on hard times. Another is the RWC Continental European Equity fund, managed by Graham Clapp. This fund is also style agonistic and is designed to find companies where financial performance will be better than the market expects.
The last option is probably the easiest choice in a late cycle scenario – a choice to be as diversified as possible through a global offering. If markets do stutter or meltdown investors could look at the likes of the JOHCM Global Opportunities fund, which has historically been amongst the least volatile in the IA Global sector. Manager Ben Leyland has a strong bias towards larger and medium-sized multi-national businesses in his portfolio, which typically holds 30-40 stocks. The philosophy of this fund is ‘heads we win, tails we don’t lose too much’, and if markets do struggle, the fund’s strict valuation process should help in this regard. The fund also can, and will, hold large cash positions if valuations are unattractive.
^Source: FE Analytics, MSCI World index, total returns in sterling, 1 January 2019 to 31 December 2019
*Source: IMF – World Economic Outlook, January 2020
**Source: IMF – World Economic Outlook October 2019