Global Equity Views 3Q 2019Contributor Paul Quinsee
Themes and implications from the Global Equity Investors Quarterly
- It has been a grand old first half of the year for equity investors, despite soft economic and earnings data, and a deterioration in the news around international trade discussions. Our team is a little cautious on the outlook but we don’t see any reason to move aggressively away from equity exposure.
- Once again this year, investors have had a clear preference for both perceived long-term structural winners and defensive stocks, coupled with an aversion to companies seen as more economically sensitive or vulnerable to disruption from technological change.
- These trends, which have only accelerated in recent weeks, are now manifested in very wide valuation spreads. While absolute returns in value stocks are robust, the gap relative to growth stocks hasn’t been this wide since the late 1990s. Our investors are finding parts of value they like (including high quality financials and disrupted consumer companies that should fare better than feared) and those that they don’t.
- Geographically, preferences are not especially strong. Europe and the UK are the most out of favor and attracting some contrarian interest, emerging markets equities are somewhere between fairly valued and cheap, and U.S. equities look more highly priced (understandable given U.S. companies’ superior growth prospects).
Since our last Investors Quarterly, in March, the positive trend in world stock markets has continued, albeit at a slower pace than in the early months of the year, and for the first half world equities (as measured by the MSCI All Country World Index) recorded their best returns in more than 20 years. These gains, from a depressed starting point, of course, come against a backdrop of sliding economic growth, especially in the manufacturing sector, and sliding profit forecasts as well.
Most of our portfolio managers remain fairly conservative in their view of equity markets, with the dichotomy between rising prices and falling profit expectations the main reason for caution. But within markets there seems to be ample opportunity for stock selection. For our value-oriented teams, the ever-growing gap in valuations between the haves and the have-nots is a recurring theme, especially as this gap is now at a level that has in the past suggested healthy outperformance from lower priced stocks. Our growth investors still see plenty of companies offering tremendous secular opportunities, with software a particularly strong focus (although valuations here do look rich in the short term). Of particular interest to the growth team are smaller companies that are poised to benefit from digital transformations across industries and are not subject to the regulatory scrutiny faced by some of the mega cap tech firms.
Overall, we can find many reasons to recommend staying invested. As we have said before, the fundamentals for the leading growth stocks remain exceptionally strong, but bargain hunting for relative value in the less richly priced value areas, smaller cap stocks and international markets is a good use of fresh money.
EXHIBIT 1 presents a snapshot of our outlook.
Views from our Global Equity Investors Quarterly, June 2019
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