For most of 2019 thus far, the macroeconomic view has surveyed green shoots appearing in the global economy. And while a stabilisation in growth is expected over the coming quarters, it should come as no surprise that the escalation of the US/China trade war in the past few weeks has certainly increased the downside risks.
That’s the outlook for capital markets according to Esty Dwek, Head of Global Market Strategy for Dynamic Solutions at Natixis Investment Managers. “Equity markets have sold off since the re-escalation of the trade war, as expected,” said Dwek. “While the growth outlook remains ok, downside risks have risen. At the same time, earnings in the US have beaten expectations, bringing some underlying fundamental support to markets.
“For now, markets remain jittery but still seem to be pricing in a US/China agreement, so short-term corrections on more negative headlines are likely. Over the medium-term though, barring a total breakdown in the trade talks, we expect risk assets to continue to grind higher, supported by an accommodative central bank and solid growth and earnings.”
The hunt for value
In the US, equities have certainly enjoyed a rally since the beginning of 2019. A better-than-expected earnings season and almost $200 billion of buybacks by the end of April supported their advance.
Those searching for value have therefore had to look elsewhere. Speaking on CNBC’s Closing Bell in April , David Herro, Portfolio Manager at Harris Associates, said that while valuations of US equities had seen a resurgence, it had not necessarily been the case across Europe.
“There are still places where there is lots of undiscovered value,” said Herro. “Specifically, when you look at European equities, they have been held back by some of the macro issues that I would argue have held back their share prices, but we still see good value creation and, as a result, we still see good investable opportunities in European stocks.
“Most of the big European companies are multinational, they have exposure to… emerging markets and the US, and especially when the euro is trading at such a low level… [this] translates back to more of an advantage for European equities that sell into dollar markets and have dollar revenues.”
Those chasing value in European equities might want to take a look at Harris’ equity strategies. The patient, long-term approach of its portfolio managers enables them to appreciate when portfolio companies are undervalued and, therefore, select them when they are attractively priced – then wait for the market to recognise what they believe is the company’s true worth. It’s an approach that has been one of the hallmarks of Harris’ success since its inception in 1976.
Going for growth
For other investors, who are still seeking the best growth strategies, it’s worth bearing in mind that it takes patience – as well as focus and insight – to generate alpha in US equities. After all, finding growth in one of the most efficient and over-researched markets in the world is no easy challenge.
A differentiated, insight-driven approach to active management can make all the difference – as Hollie Briggs, product manager for the Growth Equity Strategies team at Loomis, Sayles & Co, highlighted in a series of interviews with us late last year . Briggs explained why it takes time to research a stock and how portfolio holdings in Loomis Sayles Growth Equity Strategies are differentiated from the pack.
She revealed why, for instance, Amazon has been a portfolio holding since the strategy’s inception in 2006 – and why few active managers have held Amazon in their equity portfolios for as long. The key differentiator of Briggs’ team’s approach is the research process – even though everyone in the industry essentially has access to the same information. “It’s our focus and the quality of our decision-making process that leads us to different insights,” said Briggs. “That’s how we are able to generate different outcomes with the same information.”
With a long research horizon and multi-year holding periods, it’s an approach that’s often been likened to private equity. “We say we adopt a long-term, private equity-like approach to investing because we are essentially investing in businesses as partners”, explained Briggs. “We’re not simply trading stocks – we’re not trying to capture alpha by near-term price action. Rather, we want to find high-quality businesses with sustainable long-term structural growth drivers, and then we wait.
“We wait until short-term investors overreact, drive the price down and give us a buying opportunity – as long as our investment thesis remains intact. We are very patient investors, waiting for the right price.”
Incidentally, Loomis Sayles’ Global Growth Equity fund will have passed its three-year anniversary on 8 June 2019. This differentiated global growth strategy is managed by Aziz Hamzaogullari and it reflects his team’s distinctive low turnover, high-conviction approach to active investment management with low factor risk exposure—a strategy carefully crafted to promote strong risk-adjusted returns."
Seeing new horizons
There will, of course, be plenty of investors who find it difficult to ignore how ongoing US-China trade tensions may impact global markets in the months ahead. Should we see a return to the market volatility experienced in Q4 of 2018, navigating the turbulence might call for some alternative perspectives on the traditional equity portfolio.
The good news is there are equity strategies that are designed to deal with volatility. In January, speaking at an exclusive wealth manager event in Lugano, Switzerland, Jean-Jacques Duhot, Chief Investment Officer, CEO and Managing Partner at Arctic Blue Capital, revealed how he got the idea for his systematic equity strategy, Arctic Blue Atlanterra.
“I spent many years managing a group of discretionary traders, taking notes about their behaviour, noticing when they were patient, when they were opportunistic; why they were contrarian,” said Duhot. “And I thought, what if we could extract the best of these trading rules and turn them into code? In this way, we can overcome the natural biases and flaws of human traders and only trade when the market environment is favourable.”
Systematic equity strategies seek to capture periods of rising volatility and use the directional momentum to create opportunities for positive returns. Arctic Blue Atlanterra takes a contrarian bias, identifying when a trend begins to weaken and gradually initiating positions in the opposite direction – before the trend reverses.
“We’re overweight on the contrarian model because we want to get a low correlation to the momentum riders and instead provide a high relative return,” Duhot continued. “It allows us to provide that high reactivity at major turning points in the market. Essentially, you need to have a different type of offering to de-correlate yourself from your peers.”
A thematic approach
Yet, for those who are keen to tap into the more modish styles of equity investing, ‘thematics’ is clearly the word on the lips of many investors at the moment. Automation and technological improvements brought about by AI & robotics, for example, are changing in new and unforeseen ways how we live, interact and do business. This is occurring through the combination of significant advancements in performance capabilities and rapidly declining costs in key enabling technologies.
Likewise, the technology rapidly changing our world also creates new risks to the safety of individuals, communities, industries and nation states. As new threats emerge to this basic need, new steps will be taken to mitigate them. That creates a huge opportunity to invest in those market participants that will be on the forefront of the changes in safety.
Consider, too, the investment opportunities around water – water is a basic need, not only for human life, but also for economic development. It is a limited resource with growing demands placed upon its provision to sustain demographic and economic growth. With the increasing need to treat or transport water where it is required, and collect it when used to avoid cross contamination, demand is increasing for the provision of technologies and services to deliver the required quantity and quality of water.
At a Natixis Investment Forum in Paris this March, Simon Gottelier, co-manager of the Thematics Water strategy, outlined the diversified and differentiated investment opportunity presented by ever-growing water service and technology industry.
“A key reason why water is such a great investment opportunity is that it has perhaps the longest-term secular growth themes underpinning it,” said Gottelier. “Each of these long-term secular growth drivers are, by their very nature, fifty to a hundred-year narratives.
Changing demographics in emerging economies, characterised by the shift from rural to urban areas, is placing a huge amount of strain on existing infrastructure which drives the need for fresh government investment. Gottelier continued: “The whole water opportunity is driven essentially by imbalances in supply and demand, so governments are spending more money on the oversight of water quality – whether that’s for drinking water utilities or industrial water. And that also tends to be mandated spend, very predictable.
“Furthermore, there is a 100% correlation between water availability and a country's ability to grow its GDP. Without water, there can be no economic activity – none whatsoever.”
The balanced portfolio
Whatever your time horizons, it’s good to have several different allocation perspectives for your equity portfolio. The ongoing uncertainty around European growth and the continuing US/China trade war – not to mention Brexit and US debt ceiling discussions – means the second half of 2019 is likely to provide a bumpy ride for equity investors.
The bull-run of the past ten years may have buoyed a lot of boats. Yet, with the post-Christmas equity rally now behind us, a different and more volatile environment could expose the cracks in the hulls of some, and we might very well see a resurgence in the demand for active management.
After all, an investment style that can find those companies that outperform the market – when it’s not all going in one direction – with be harder to find. Moreover, active managers can react directly to pricing pressures related to fundamentals and valuation on stock prices.
It seems prudent, therefore, to pursue both growth and value equity strategies, and to seek to take advantage of both short-term market volatility as well as the longer-term secular growth opportunities. More often than not, balanced, flexible portfolios will be well positioned for whatever shifts and surprises lie ahead.
The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of Natixis Investment Managers and its affiliates as of May 2019. There can be no assurance that developments will transpire as may be forecasted in this material. Past performance information presented is not indicative of future performance. Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information. This material may not be distributed, published, or reproduced, in whole or in part.