Global Equity Strategies: July 2020 Commentary


July was characterised by a weak US dollar – many markets were down or flat in local currency terms except for the US market which had another strong month for all risk assets. USA Equities rose strongly countering the weakness in the US dollar. The Australian $ rose 4% against the US$ as did most major currencies.

The Global High Conviction Strategy of 30 stocks rose 2.6% in US$ terms compared to its benchmark, a Value Weighted Index, of + 1.8% in US$

The Global Trust portfolio managed to a style neutral market capitalisation index, rose by 3.33% in US$ terms (-0.67% in AUD terms). The MSCI World Index rose by 4.78% in US$ terms driven by continued price appreciation in the mega cap growth stocks.

We continue to prefer quality equities with strong balance sheet and above average earnings stability. We have said from the outset of the crisis that the recovery is going to take some time. No sooner have countries eased lockdown and we are already seeing rising cases and reintroduction of some lockdown measures. This is bound to vary from country to country and the success of governments to contain outbreaks through good monitoring measures (track and trace, etc). A game changer would be an early vaccine and with over 100 possible vaccine candidates worldwide and early trial successes for a number of them, we should not be too negative and caught up in the near-term news on cases.

In the near term we believe markets are in some sense in denial of the difficult road ahead

What are these signs of complacency?

  • USA market concentration is extreme with 5 stocks now accounting for about 20% of the S&P 500. This essentially means that the market capitalisation index in the USA is a highly price momentum-based risk exposure. Such exposures work well until they don’t. Narrow market breadth is always a warning sign.
  • The volatility in certain asset classes such as oil is rising. This typically indicates an imminent ‘shock’ to the system. No one is expecting an oil price rise but if it occurs you can be reasonably sure we will see a back-up in bond yields and elevated inflationary expectations.
  • Inflationary expectations are building as evidenced in this chart which compares the bond yields of nominal and index linked bonds to arrive at a breakeven inflation forecast. Something is wrong in market assumptions here and we would not be surprised to see inflationary expectations jump as soon as q4.
  • The Euro has bounced as the EU appears to have moved to fiscal unity essentially meaning that Germany’s credit rating can now be applied to the bankrupt periphery. Given that the EU covid recovery package amounts to less than 1% of GDP and that the Italian banks need over E600bn to be recapitalised we think we are "not out of the woods yet"

We now show a chart of asset class returns during turbulent and non-turbulent periods. We are due for another period of 'doubt' aka a pull back. The potential sources are many.

Our defensive positioning seems prudent.

Source: Kritzman

So, we therefore suggest that investors remain diversified; become a little more defensive in equity positioning; and favour dividend paying companies and those with strong balance sheets.

We wanted to illustrate further our points about the misunderstanding of the Japanese economy. We are overweight Japanese stocks in both strategies.

Below we show what inflation adjusted GDP PER CAPITA OF WORKING AGE looks like when compared to other countries. Japan’s problems are not those of productivity but population workforce participation and demography. To argue that the Japanese solution to its problems, should be applied to all other countries’ problems (namely zero interest rates for ever) is not correct. Countries such as the USA, the UK, and Australia have strongly growing populations and their shortcomings arise from poor fiscal policy / insufficient capital investment! Enough said.

Source: Bank of Japan

The Top 10 positions in the Global Trust are as below and we remain overweight Japan and underweight Europe. In July we added Akamai Technologies and Electronic Arts.

SONY CORPORATION Consumer Discretionary JAPAN
MICROSOFT CORPORATION Information Technology NORTH AMERICA
TERADYNE, INC. Information Technology NORTH AMERICA
NTT DOCOMO INCORPORATED Communication Services JAPAN
NVIDIA CORPORATION Information Technology NORTH AMERICA
ALIBABA GROUP HOLDING LTD - ADR Consumer Discretionary ASIA PAC ex JAPAN
PING AN INSURANCE (GROUP) COMPANY OF CHINA LTD Financials ASIA PAC ex JAPAN
SHIN-ETSU CHEMICAL CO LIMITED Materials JAPAN
LEGAL & GENERAL GROUP PLC Financials UNITED KINGDOM
QUALCOMM INCORPORATED Information Technology NORTH AMERICA