Can a global equity fund offer diversity?
Global stockmarkets are increasingly correlated and interconnected
Investors are told time and again that diversifying their investments is key to getting good returns – in essence, not to ‘put all their eggs in one basket’. But amid global financial turmoil, where events like the eurozone crisis can affect growth in areas such as Asia and the US, can a global equity fund offer true diversification?
The eurozone crisis has been rumbling on for the past two years, with the recent summit at the end of June appearing to at least temporarily calm the markets with an agreement that included the first steps towards a banking union in the region. However, there is still no definitive resolution.
Elsewhere in the developed world, the IMF has warned the US is facing a ‘fiscal cliff’. Expiring tax cuts and automatic spending reductions that are legislated to begin next year would shrink the budget by roughly 4 per cent, which could jeopardise both the US and global recovery.
Even emerging markets are not immune to the global slowdown. The latest data from the Organisation for Economic Co-operation and Development’s (OECD) composite leading indicators (CLIs) notes that while growth appears to be picking up in Brazil, data in China and India “point strongly to a slowdown with economic activity falling below long-term trend”.
Russia is currently remaining above the long-term trend, alongside Japan and the US, but the OECD adds the CLIs “continue to point to dissipating momentum, especially in the case of Russia”.
OECD figures for the G20 countries note that first quarter GDP growth was still positive, with 0.8 per cent compared with 0.7 per cent in the final quarter of 2011 is a positive. Nevertheless, the OECD warns that “this small pick-up in aggregate G20 GDP growth still masks diverging patterns among the world’s largest economies”. China saw a slowdown in growth for the second quarter to 1.8 per cent and growth also slowed in India, Indonesia and South Africa, while GDP contracted in Italy and the UK. However, there was some positive news from Australia, Germany, Japan, Korea, and Mexico, which all saw growth accelerate in the first quarter.
In her keynote speech at the Nikkei Symposium in Tokyo on July 6, Christine Lagarde, managing director of the IMF, said: “Over the past few months, the outlook has, regrettably, become more worrisome. Many indicators of economic activity – investment, employment, manufacturing – have deteriorated, and not just in Europe or the US, but also in key emerging markets: Brazil, China, India.
“In the IMF’s updated assessment of the world economy, the global growth outlook will be somewhat less than we anticipated just three months ago. And even that lower projection will depend on the right policy actions being taken.”
With so much uncertainty, are there are any positives to investing in global equities?
Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management, admits there remain risks to growth but suggests more accommodative global monetary policy, alongside the fall back in oil prices in the second quarter, “may lead to the basis for a gradual turnaround in sentiment as well as the economy”.