Q3 Outlook:Global Value Equities
The greatest risk in the next 12 months is still a continued decline in interest rates and mounting recession fears
Good end to the quarter for global value shares
Global shares gained 4.2% in the third quarter of 2019 but the increases were primarily prompted by a stronger USD. The rise in USD reflected the fact that many investors sought a safe haven, which was also underlined by rising gold prices. The reasons for the waning risk appetite are the continued deterioration in economic indicators, the declining growth in earnings and a yield curve indicating a heightened risk of recession over the next 12 months. In addition the trade conflict between the United States and China remains unresolved, which contributes to uncertainty and reduces companies’ willingness to invest. This trend also caused several central banks to implement rate cuts and other easing measures and talk in earnest about making greater use of fiscal stimulus.
As mentioned in the last quarterly report investors’ immediate response to more subdued growth prospects and declining interest rates is to buy growth shares and stable/defensive shares. This was also the case in the first two months of the third quarter but in September we suddenly saw quite the reverse: during the course of just a few days value shares massively outperformed the market and as a result our value portfolios performed excellently in September. The main reason seems to be positioning: today everyone wants to own growth and stability whereas no one wants to own value. Consequently it does not take much for value shares to outperform. Metaphorically speaking it is like a forest after a drought lasting several months – it only takes one spark to set off a fire. As we also mentioned last quarter we have never managed such inexpensive value portfolios as we do today. The reverse is true of growth shares and stable/defensive shares: seldom have they been more expensive than they are today. As we see it, this polarisation internally in the market creates a number of interesting opportunities and prepares the ground for our value portfolios to perform well going forward even though the precise timing is hard to predict. The spark needed to set value shares on fire could come from for instance greater use of fiscal stimulus, a solution to the trade conflict or a stabilisation in economic indicators.
The greatest risk in the next 12 months is still a continued decline in interest rates and mounting recession fears, which is exacerbated by the unresolved trade conflict. Normally our more cyclical value shares would underperform the market on the brink of recession. The difference today is however that many of our shares are already trading at mid-recession prices.