Global equity uncertainty keeping investors 'on the sidelines'

It is testament to the shake-up that happened in 2022 that the two best-performing markets in the world were the FTSE 100 and Latin American equities, both of which had generally been in the doldrums. 

But if market movements in 2022 were clearly in one direction as investors sought to protect their portfolios from rapidly rising inflation, the new year brought only less certainty, with growth, value and defensive equities each enjoying a period of favour with investors.

This was due to the challenge of responding to first, expectations of a recession, then the realisation that economies were proving more resilient than expected, and finally the potential for inflation to remain higher for longer. 

Rotations between those styles will likely be sharper and more frequent.Simon Webber, Schroders

James Thomson, who runs the Global Opportunities fund at Rathbones, says the uncertainty is causing many investors “to stay on the sidelines right now”.

He adds that, with two-thirds of economists expecting a recession, “the element of surprise around a downturn has gone but there has been the pleasant surprise in how resilient economies and markets have proven to be during the recent banking crisis in the US.”

Thomson says the companies that will thrive in the market conditions likely to prevail over the coming year will be businesses that “have pricing power, and provide mission critical services to their customers.

"It is important to own the strongest companies in the different sectors; one of the reasons for the market movements of last year is there were a lot of companies that were not resilient if the world changed, and when the world did change, companies such as Shopify found they were built for a world that no longer exists.” 

Short-term indicators

But the major thing Thomson says he believes investors get wrong is to focus too much on valuations as a short-term indicator of the potential for a stock price, as he says there is no correlation between the valuation at which a company trades today and the prospects on a 12-month view. 

Simon Webber, global equity portfolio manager at Schroders, agrees that investor fixation with growth or value stocks is likely to be otiose in the coming year, both because neither of those investment factors look either particularly cheap or expensive right now.

 “And the outlook for the market likely means that the rotations between those styles will likely be sharper and more frequent than they were in the decade between the end of the financial crisis and the start of the pandemic when growth stocks enjoyed a long period of outperformance, and then in 2022 when value stocks did well.”

Thomson says one of the areas of the market that has already held up well and that he expects will prove resilient in the event of a recession is luxury goods.

The fund manager says: “The reality is that even if there is a recession, the consumers who buy the ultra-luxury goods are the people who are not personally in recession.” 

This is a theme echoed by Gabrielle Boyle, global equity manager at Troy.

Her view is that those companies, because they produce a smaller volume of expensive goods, do not have a lot of capital tied up in stock or other costs that are hard to cut back if demand declines.

One of the reasons for the market movements of last year is there were a lot of companies that were not resilient if the world changed.James Thomson, Rathbones

Boyle’s says the companies that will suffer most in the coming year are those with higher levels of debt, as refinancing costs will rise. 

Matthew Page, who runs the Guinness Global Equity Income fund, says many of the global consumer goods companies have weathered the inflationary storm better than had been expected. 

Those negative on the outlook for large consumer goods companies had taken the view that consumers would trade down – that is, buy cheaper versions of products – and this would hit profits. 

But Page says the biggest companies have been able to put up the prices of their premium products and that has protected margins. 

Zehrid Osmani, global equity manager at Martin Currie, by contrast says valuation is likely to be a key consideration for investors as he notes one of the features of the market in the coming year could be that the earnings forecasts for companies is downgraded.

As those forecasts are a major factor in the valuations at which companies share prices trade, he feels the companies that are presently trading at the cheapest valuations will have greater capacity to do well if earnings are downgraded, because to a large extent they are already trading at levels which reflect the bad news. 

Focus on investing in companies that have already got proven business models and cash flows.David Harrison, Rathbones

On the sustainable investment side of the ledger, David Harrison, who runs a sustainable global equity fund at Rathbones, says: “It has been a very tough year for sustainable equity investors. This is because, for the most part, the companies will generate more of their revenues in future than they do now because we are the start of a transition.” 

Higher interest rates today mean investors can get a return from cash or government bonds immediately, and this reduces the appeal of owning assets for which one has to wait numerous years for a return.  

He says the key way to approach a sustainable investment opportunity in that context is to focus on companies that “are not just about investing in the next big thing, and instead focus on investing in companies that have already got proven business models and cash flows.”  

David Thorpe is investment editor at FTAdviser