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The outlook for global equities

The current bout of risk aversion has been driven by a number of separate worries. Perhaps the biggest is the fear of a “disorderly default” by one or more of the peripheral eurozone nations, and the chance of contagion, or a domino effect, across the global financial system.

Following the demise of Lehman Brothers in 2008 there were very few places to hide and we witnessed a complete freeze in global liquidity. We do not think we are going to see a re-run of these conditions, although there is more wrangling to come before the European debt situation can possibly be resolved.


A second, and equally important, worry is that the tepid economic recovery in the developed world is running out of steam and that we are about to slide back into recession. Following recent data from the US, UK and Europe it is hard to disagree with the fact that the recovery is losing momentum. However, we do not believe that a prolonged recession is on the cards and, importantly, we remain confident in the growth profile of emerging markets.


Even so, we are in a lower global growth environment, and low growth has serious implications for corporate profitability – especially in cyclical areas such as oil and sectors linked to the Western consumer. For some time we have been forecasting modest growth and a peak in the profit cycle. Recent data suggests that growth is likely to be lower, and the peak in profits sooner than we had expected.


In this environment we are emphasising secular growth companies with pricing power and the ability to control costs. We are finding good opportunities among mega-cap companies, many of which are trading very cheaply. They are also typically defensive and wellcapitalised, which makes them attractive in times of uncertainty. Here we continue to see great value in cheaply-rated US technology companies such as Oracle, IBM and Google.


On a sector basis we have been increasing our exposure to healthcare (buying stocks such as Novartis) and consumer staples (for example, Pepsico), which are also attractively valued and have appealing defensive growth characteristics.


Geographically, many investors seem to have given up on developed markets. Why is this, given the problems in these economies and the superior growth opportunities offered by the emerging world?


The first thing to note in answering this question is that a fund’s country weightings can be the result of stock selection efforts rather than targeting a specific exposure to a given market. Our stock selection process leads us to believe that it is completely wrong to avoid developed markets at this stage. We are much more interested in companies based in developed markets that are exporting to emerging markets than the reverse.


Perversely, up to a point, weak domestic conditions can actually be beneficial for exporters based in the eurozone. We saw in the 2008/9 downturn that well-managed companies can control their costs and their cash positions in times of adversity, and how those that are exposed to EM growth have hit new highs in terms of earnings over the past year. So we embrace the opportunities in developed markets, and our direct exposure to emerging markets is mainly in companies in domestic sectors such as financials, telecoms and utilities.


In summary, global equity markets face a number of challenges over the coming months but we continue to find good opportunities to make money over the medium term. Our flexible and truly global approach allows us to position our funds in the areas that offer the best risk-adjusted returns. This approach has worked well over the past five years and we are confident that it will continue to add value for investors in the future.


Important notes

For Investment Professionals use only, not to be relied upon by private investors. Past performance is not a guide to the future. The value of investments and any income from them can go down as well as up. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal.


William Davies, Head of Global Equities - Threadneedle, December 2011

Please note that these are the views of William Davies at Threadneedle, and should not be interpreted as the views of RL360°.

Author

William Davies

Head of Global Equities
Manager, Global Select Fund
Threadneedle - December 2011

Please note that these are the views of William Davies at Threadneedle, and should not be interpreted as the views of RL360°.

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