At GAM Investments’ Weekly Investment Meeting held on 18 September 2019 the speakers were Mark Hawtin, who discussed disruptive growth opportunities, and Ali Miremadi, who talked about the outlook for the global equities market.
Equities: World Growth
There have been a series of fundamental macro events, such as Brexit and the US-China trade war, which are creating a high degree of uncertainty and market volatility. This creates a tug of war between concerns on the macro side versus the fact that equities are under-owned and inexpensive. In general, there is a view that many prefer a safe investment with low returns.
Fundamentals remain very important. In a major bull market, there is typically a lot of excitement about technology. Over the past few months, companies that have failed to fulfil their promises have typically been punished. Within retail, for example, having only an online offering is no longer good enough; companies need to have an omnichannel strategy to market. Ride sharing is another example of an area which is on something of a hype cycle, with the models that exist currently in areas such as transportation as a service not where they are likely to eventually settle.
We have seen some late cycle IPOs born of a desperate need for cash. WeWork is one example, in our view, of a company which could well have an unsustainable business model. Indeed we have seen signs of some of the ‘froth’ we saw around markets at the time of the TMT bubble in 1999/2000.
Looking forward, we anticipate little slowdown from true growth companies, however we may see more mixed results in more cyclical or incumbent-type businesses.
2019 has seen global equities rise 18% in US dollar terms despite slowing purchasing managers’ indices, the ongoing US-China trade war, Brexit and active conflict in the Middle East. This is largely because of falling global interest rates: US 10-year Treasury yields have fallen from 3.2% in late 2018 to around 1.5% at the time of writing. As Sanford Bernstein has pointed out, for global asset allocators there is no risk-free rate available in fixed income. Global property prices are also high. Cross-asset investors are therefore increasingly having to turn to equities – the only game in town.
Low interest rates have helped the premium of ‘growth / low volatility / momentum / quality’ stocks over ‘value’ expand to its highest ever level on a relative basis. We continue to believe value can be found in a fundamental, idiosyncratic, stock-specific fashion rather than looking for optically low-multiples. We think there are tactical opportunities in stocks which are trading at a steep discount to estimates of long-term intrinsic value.
Around a quarter of the total return from global equities this year can be attributed to technology. Tech continues to be by far the biggest driver of performance in global equities and it has been difficult for more value-biased areas to keep up – earnings growth has not risen in line. Seldom has there been a more important time to focus on individual stocks. It is more important than ever to be selective about idiosyncratic risk, seeking value with internally generated growth. In this environment we are optimistic about the potential for return from such opportunities.
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Source: GAM unless otherwise stated.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a security is not a recommendation to buy or sell that security.