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Global equities: upwardly cautious

Markets inching up in 2020 seems to be a growing consensus among fund groups.

US-China trade tensions, Brexit uncertainty and ongoing protests in Hong Kong were some flashpoints that stole the headlines in 2019, overshadowing the surge in global equity fund performance.

The international equity fund category has returned 22% year-to-date versus a negative result in full year 2018 (-11.8%), according to FE Fundinfo.

No one expects the outperformance to continue, and financial professionals have been busy ratcheting down investor expectations for 2020.

Analysts have also been warning that interest rate policies – which have been supporting key equity markets — are losing effectiveness.

But Japan has turned to fiscal spending stimulus, and the UK and the ECB are likely to follow, which should provide a boost to equities.

Yield hunt continues

Summing up sentiment is Hermes Investment Management base case for “muted stock market performance” next year.

“In 2020, we forecast equity earnings to increase by around 5% in the US and 6% in emerging markets, and to contract by 3% in the Eurozone,” wrote Geir Lode, head of global equities, in the firm’s 2020 outlook report.

Hermes is targeting global equities with “reliable returns” with an emphasis on “quality companies with higher profitability, lower financial leverage, and less earnings volatility than the overall index”.

In the US and Eurozone, high-yielding quality stocks, for example financial and utilities companies, are preferred. Likewise in Asia, “in markets where the dividend yield on stocks is higher than the yield on government bonds, particularly in Singapore, Hong Kong, Thailand, and Taiwan”.

Lode wants to avoid companies exposed to global trade, which are likely to be volatile.

“We prefer stock markets that rely more on domestic spending,” he wrote. In the US, 69% of US company revenue is generated domestically compared with 47% in the Eurozone.

Bank of Singapore also predicts a mild growth recovery in mid-2020 if there is no further escalation in tariffs.

BOS looks at global markets through the interest rates lens and sees the US Federal Reserve keeping rates on hold next year.

“Importantly, the Fed’s commitment to keep rates at current levels or lower until inflation is anchored above its long-term 2% target means the Fed would not hike until 2021 at the very earliest, by our estimates.

“This prolonged period of low rates would form a runway for risk assets appreciation and comprise a supportive factor for markets ahead,” the bank said in a note to clients.

In a departure from other banks, BOS prefers Europe equities to the US and Asia. “Europe equity valuations have, to a large degree, discounted the economic weakness in Europe and the geopolitical issues relating to Brexit and Italy,” the bank said.

Within Europe, it has an overweight on energy, healthcare, consumer staples and consumer discretionary.

2020 wild card

Jupiter Asset Management’s vice chairman Edward Bonham Carter also sees a gentle increase in equity markets, but is one of several voices highlighting the disruptive effect of the US presidential election in November 2020.

On the one hand, a study of election cycles showed an investor holding a portfolio of stocks that mirrored the S&P 500 index in the 27 months preceding a US election saw significant returns.

“The value of their portfolio increased anywhere between 16% and 70% depending on the election year,” Bonham Carter wrote in a client note.

However, “the same study found bear markets, defined as a decline of 15% or more in the value of the S&P 500, historically tend to happen in the first and second years of presidential terms.

“This last point is all the more relevant given the length of the current bull market.”

Chasing the index

The thing about global equity funds is that the category has not beaten the MSCI AC World Index in the last ten years:

Source: FE Fundinfo. Discrete calendar year returns in US dollars.

In 2019, less than half of global equity funds – 43 out of 138 funds in the category – beat the index.

That said, not one fund in the category was negative. The “worst” performer – Stewart Investors Worldwide Equity – returned 9.5%.

The top performing actively-managed product is the AB Concentrated Global Equity Portfolio, up 33% year-to-date. About half the portfolio is in US equities.


2019’s top and bottom three global equity funds vs the sector and MSCI World

Source: FE Fundinfo. Year-to-December 13 returns in US dollars. Excludes passive funds.

 

Part of the Bonhill Group.