Firstly, the European Central Bank’s earlier-than-expected resumption of economic stimulus was not welcomed by investors.
This is in clear contrast to the US Federal Reserve’s pause in rate hikes which acted as a tailwind for global markets.
This dynamic emphasises the relatively perilous position the ECB finds itself in and the ongoing fragility of Europe’s economic recovery.
A trade agreement between China and the US is still on the cards as Mr Trump seeks to land a deal to secure his legacy. This was followed by disappointing labour data in the US and acutely underwhelming export numbers from China – which showed a month-on-month drop of 20 per cent.
While these numbers are volatile, it gave a grave signal that global growth is slowing more than expected.
On top of this, the Brexit negotiation spectacle rolls on, heaping uncertainty onto an already challenging macroeconomic outlook.
And finally, we face the threat of another government shutdown in the US over the funding for President Donald Trump’s wall.
Reasons to be optimistic
This is a finely brewed macro picture with plenty of lurking dangers and idiosyncratic risks. But amid the gloom, there are reasons to be optimistic.
A trade agreement between China and the US is still on the cards as Mr Trump seeks to land a deal to secure his legacy.
Meanwhile, M&A remains elevated – a number of large deals have been rumoured, from banks to semi-conductors, and we have seen large acquisitions in pharma and gold miners.
By aggregating total global M&A transactions over the last two decades, 2018 emerges as the highest in 20 years – and this year, so far, is set to match the record.
This buoyant backdrop for M&A should help support equity markets.
Global market fundamentals also appear to be on steady footing. For example, not only did 70 per cent of US companies beat expectations in the latest earnings season, 85 per cent of tech companies also surpassed analyst expectations.
Additionally, we believe there remains a lot of untapped support for the current rally. EPFR flow data for active and passive strategies show the recent rally has actually had little support, with net negative flows – and was fuelled mostly by short covering.
Broadly, investors have sat on the sidelines and have yet to participate; this could well provide another leg to the equities rally.
The crux of the situation for us is, while growth is slowing, there remain opportunities out there – and the performance chasm between value versus growth is a fertile bed of opportunity for active managers.
Globally, growth has outperformed year-on-year – with a cumulative outperformance of 31 per cent over the last decade. As active managers, it is our job to exploit the relative value which has been created by this price disparity.
Relative value opportunities
We will never invest in value for value’s sake. Manager selection is critical.
We have seen managers that have not only outperformed their respective value benchmarks but also the market as a whole.
In this environment, we are very excited to find managers who are outperforming benchmarks, and still hold the extra margin of safety of having a style that has underperformed over the last decade.
In this vein, we recently added to British Empire Trust, which looks for undervalued closed-ended funds or holding companies on a global basis.
The portfolio management team is world class in applying its dedicated approach of finding companies trading at a discount to net asset value, and it looks for catalysts which will narrow this discount. This is an example of a value manager that has consistently performed well, despite difficult conditions.
The trust is not only at a discount, but the discount on the underlying companies is at a three-year high, thus providing an attractive double-discount.
We have also taken a new position in the Pacific G10 Macro Rates fund, which is an innovative new fund managed by a team we know closely, formerly of Aberdeen Standard Investments.
The edge of this strategy is not finding out, for example, what the Fed’s next move will be or the outlook for Japanese inflation, but the team’s expertise lies in understanding pricing structures by building their own models and taking a series of trades to exploit idiosyncratic risks.
In volatile times, this strategy provides a vehicle to capitalise on prevailing macro uncertainty.
Vincent Ropers is co-portfolio manager of the TB Wise Multi-Asset Growth fund
