Markets have been hit hard by the virus, but a broader picture suggests the global sector will throw up opportunities.
The global bull market that began back in 2009 appeared to be gaining fresh momentum in the early days of 2020. Having faced myriad threats over the past decade, from terrorism and natural disasters to trade wars and constitutional crises, investors could feel relatively optimistic regarding the outlook for the global economy. Until, that is, coronavirus, or Covid-19, emerged as a potential ‘black swan’ event, sending markets tumbling and prompting the OECD to warn that global growth could be halved as a result.
The long-term effects of coronavirus can only be a matter of speculation, but the short-term impact on the supply chain quickly rippled through countries worldwide. Global manufacturing suffered the sharpest contraction in over a decade in February, according to the JPMorgan Global Manufacturing PMI, while manufacturing activity in China fell to the lowest level since records began in 2004.
Horns of a dilemma
This is the landscape that managers in the global sector must now navigate. If recent years have been relatively kind to global funds, stiffer challenges will lie ahead for some, predicts Simon Edelsten, co-manager of the Artemis Global Select fund and the Mid Wynd International investment trust.
“Quite often managers who do well in the short term have taken a lot of risk, and when something like coronavirus strikes this becomes apparent,” says Edelsten. “Markets began the year feeling bullish, so this has taken the wind out of investors more harshly than it might have done. This is one of those unknown unknowns that can strike at any time from nowhere. It affects all funds, but some worse than others.”
The global sector has been long been driven by US companies, reflecting their continued dominance of global indices. US firms account for 73% of the world’s listed IT sector and 65% of healthcare by market capitalisation, according to figures from S&P Dow Jones Indices.
“The US typically accounts for around 50% of fund weighting in the sector,” notes David Thomson, chief investment officer at VWM Wealth in Glasgow. “Accordingly, performance is significantly influenced by how well the US is doing.”
The strongest IA global sector performers over the past five years include Baillie Gifford Global Discovery, Robeco Global Consumer Trends, Morgan Stanley Global Opportunity and T Rowe Price Global Focused. While they each take different approaches, all invest at least half of their assets in the US and have significant exposure to the technology sector.
The recent strong performance of US growth stocks is due partly to a change in the country’s economic policy, according to Ross Middleton, senior investment manager at Murray Asset Management. “Expectations had been for a gradual rise in interest rates over the year; however, set against a backdrop of low inflation and slowing economic growth, the US Federal Reserve reduced rates on three occasions in the second half of 2019,” he explains.
“Given this background, those global collective investment vehicles with a relatively large weighting to the US and in particular to technology companies, such as the Guinness Global Innovators fund, were some of the best performers over the year.”
But while US growth stocks have been a driver of global equities performance, valuations in some areas of the market have become stretched. “Even before the rally in early 2020, we saw limited scope for upside and a lot of investor crowding,” says Mikhail Zverev, head of global equities at Aviva Investors. “The recent sharp correction in these high-quality/high-growth stocks following the outbreak of coronavirus shows how vulnerable they had become to a shift in investor sentiment.”
A broader picture
The low economic growth environment of recent years has favoured growth stocks, pushing investors towards companies delivering faster growth than the global economy as a whole. “This has resulted in outperformance of sectors such as technology and smaller companies,” says Thomson. “We have also witnessed a lot of disruption to established industries where buying cheap shares and waiting for a recovery is no longer possible.”
Middleton makes a similar point, observing a significant divergence between companies perceived as offering above-average sales and earnings growth, and their more cyclical, value-orientated counterparts such as banks and retailers. “As a result those global mandates with a growth bias have outperformed those with a value bias.”
Funds in the global sector also have a natural diversification advantage, given the depth and breadth of their search area. In this sense they compare particularly well with UK mandates, says Edelsten. “If the most promising areas of the global economy are technology or automation, we can fish in deeper waters. The UK offers very little in these sectors. Many of the best technology companies are in the US; the best automation companies tend to be in Japan. So global portfolios should by their nature be stronger.”
But effective diversification shouldn’t be taken as a given, he adds. While a global portfolio will be naturally diversified, some managers are “running their winners to the point that they become a ticking bomb in the portfolio”. “A good tip is to check what proportion of a fund is taken by the top 10 companies. If it is over 50%, then they are taking some big bets,” says Edelsten. “Money is like manure, as the old adage goes — so spread it.”
Even with the unknowns around the spread and impact of coronavirus there will always be opportunities for funds in an area as broad as the global sector. Zverev at Aviva sees plenty of value in global healthcare, despite political controversy around the US elections and the possible repercussions for healthcare policy. “We see opportunities in companies that will help control costs in the US healthcare system, and help global pharma companies deliver innovation and drug discovery in a more cost-efficient way,” he says.
He also keeps a close eye on the opportunities arising from the widening roll-out of 5G, which he expects to be disproportionately beneficial for companies where this benefit is not fully in the price, such as those in the semiconductor industry.
Some managers were anticipating an early 2020 correction even before the significance of coronavirus became apparent. Edelsten at Artemis was selling companies that looked overpriced, but struggling to find others that offered good value. “As a consequence we went into this crisis with 7% in cash in the Artemis Global Select fund. With markets down heavily we have been able to deploy some of that and are waiting for more opportunities.”
Yet he remains relatively optimistic about the global equities outlook, even if 2020 proves to be flat. “You have to take into consideration the disruptive impact of the virus and look for other big macro issues on the horizon. The virus is highly infectious, but fatality rates are low.”
Spotlight on sustainable gains
Environmental, Social and Governance (ESG) is emerging as an increasingly influential theme in the global sector. Firms are adapting to ESG considerations as they increasingly recognise that it is a long-term trend and not a short-term theme, according to Ross Middleton at Murray Asset Management: “One example of this is the major oil companies, which are facing pressure to increase investment in renewable energy and reduce emissions,” he says.
Rising demand for sustainable investments has helped drive strong performance from a number of global funds with an ESG mandate. Middleton picks out examples including the Kames Global Sustainable Equity and the Pictet Global Environmental Opportunities funds.
The US is less advanced in this regard than Europe, observes David Thomson, chief investment officer at VWM Wealth in Glasgow. “Investors may therefore benefit from a greater focus on ESG issues in the US, as well as less developed markets.” He singles out the Fundsmith Sustainable Equity fund, which invests in ‘quality’ companies expected to be long-term winners in their industries, and Kames Global Sustainable Equity, a fund designed to generate growth by identifying innovative and disruptive companies with a sustainable mindset.
He also offers a nod to a passive option, the Vanguard SRI Global Stock fund, which invests in ESG-screened index securities.
|IA Global ESG-mandated funds||Total return (%) over|
|1 year||3 years||5 years|
|Kames Global Sustainable Equity||28.6||48.0|
|VT Gravis Clean Energy Income||26.0|
|Baillie Gifford Positive Change||21.5||80.3|
|M&G Global Listed Infrastructure||20.1|
|Janus Henderson Global Sust Eq||16.3||35.2||66.6|
|Investec Global Environment||16.1|
|Sarasin Responsible Global Equity||16.0||32.3||64.0|
|BNY Mellon Sus Global Equity||15.6|
|M&G Positive Impact Sterling||15.4|
|Global sector average||6.9||18||49.1|
Note: Ranked over one year. Source: Morningstar, to end February 2020