Please see below an article received late yesterday afternoon from Jupiter which provides their latest market consensus:
Emerging Markets
Four key themes for emerging market investing
Salman Siddiqui, Fund Manager, Global Emerging Markets, outlined four investment themes that excite him in emerging market (EM) equities. These include the digital transformation of EM businesses, as companies use technology to improve the overall customer experience, such as through a better website or payment platform – and Covid-19 has obviously accelerated that need. IT consulting companies should be well placed to benefit from that trend, he said.
The second theme is a consumption and lifestyle improvement in EM, just one manifestation of which is in the area of sports participation, said Salman. China has seen a massive increase in the number of marathons, for example, and this trend offers opportunities for sportswear manufacturers. The third theme is the ‘plumbing’ behind the scenes of the technology sector, including chipmakers and chip designers. As the world moves towards greater automation and greater connectivity, Salman sees these companies as becoming more and more critical.
Salman’s fourth theme, financial inclusion, is one he sees as particularly important in EM, where it is not only a financial opportunity but also a social opportunity to help communities. He notes that in South Africa, where 12 million people – a third of the adult population – are classified as ‘unbanked’, there’s a company that offers financial products to help drivers start minibus taxi businesses. 80% of its customers were previously financially excluded and would not have had access to credit. The company has created a tech-savvy business that operates profitably, serves the country’s thriving minibus industry and provides drivers with a potential pathway to avoid poverty, Salman said. This is an example of an investment opportunity that not only stacks up well from an ESG point of view, he said, but is also appealing on fundamentals, combining high return on invested capital, a moat to help it sustain those returns over time and the ability to compound those returns over time.
Value Equities
Addressing disruption and ESG concerns for Value stocks
Value, as a style of investing, continues to experience an historic period of underperformance relative to Growth, said Ben Whitmore, Head of Strategy, Value Equities. The reasons often cited for Value’s continued stay in the doldrums include issues around disruption, ESG and low (or zero) interest rates into perpetuity.
On disruption, Ben highlights that Value investing has coped with disruption on other occasions over the decades. He is keenly aware that at times of disruption some industries do not survive, but believes that Value opportunities remain in sectors that, although they face challenges, are not facing an existential crisis. Ben sees ESG risk as an investment risk and is keen to point out that investors should look beyond simple ESG scorecards, which can reward companies merely for disclosure and describe the past more than they do the present or future. He thinks it is important for investors to look deeper at the specifics of a situation. An example is Japanese equities, which in aggregate are undergoing a positive change in governance culture, historically an area of weakness. Mining is another example. It’s a sector that understandably raises various ESG question marks, but Ben pointed out that base metals will remain a key component of the global economy and that investors should actively engage with mining company management on issues such as staff working conditions and environmental impact, among other topics.
The past few years have been a grim period for the Value style. However, when Ben looks at the extreme levels of low valuation, the strong balance sheets that can be found, and a historical precedent that shows Value has tended to bounce back strongly from periods of extreme underperformance, he feels relatively optimistic about the outlook for Value.
Global Convertibles
Green bonds finally come to convertibles market
Although convertible bonds as an asset class have done well year-to date, this has been driven almost entirely by 100%-150% rises in the share prices of US technology and software services stocks, says Lee Manzi, Fund Manager, Multi-Asset. With their sky-high valuations and often less-than-robust balance sheets, these stocks present a high hurdle to investment for any strategy aiming for superior risk-adjusted returns.
Lee notes the market is waking up to this risk. The latest Bank of America Merrill Lynch survey shows global fund managers have started to trim their tech equity positions and move into cyclical companies such as industrials. This can also be seen in the convertibles new issues market, which for much of 2020 has been dominated by tech firms coming to market, partly because high share prices reduce the probability of the bonds having to convert and dilute equity.
More recently, Lee has observed new issues coming from a much broader range of recovery-oriented companies such as airlines, retail and travel/cruise lines. The quantity of new issues is currently 80% higher than a year ago and the convertibles market is finally seeing the issuance of Green convertibles (e.g. by a giant French utility company), which have accounted for around 5% of new issues year-to-date designated as green bonds. Looking ahead, Lee expects these to make up an even greater proportion of new issues as the green bond market continues to grow and diversify.
Absolute Return
Earnings momentum won’t guarantee returns
Last week, European equities outperformed global equities, partly driven by re-ratings, but more interestingly also by earnings momentum, said Tommy Kristoffersen, Equities Analyst, Absolute Return. A couple of months ago, Tommy noticed that those sectors with the biggest earnings downgrades were actually outperforming. More recently, however, that relationship has reversed into a more intuitive one, with earnings changes positively correlated with relative sector performance for the majority of sectors
Over time, there’s actually little evidence that picking the stocks with the best earnings momentum beats the market, said Tommy. Research from Liberum showed that a strategy of investing in the top quartile of UK stocks with best earnings momentum, and rebalancing monthly, would have generated the same returns over the last 20 years as investing in the bottom quartile. There’s one important caveat though: the bottom decile for earnings momentum dramatically underperformed other groups, generating a negative return over 20 years. So, in other words, it’s ok to identify stocks that are generating lots of earnings momentum, but the most crucial thing is to avoid the losers.
You might think, perhaps, that the best way to avoid the losers is to stay on top of earnings forecasts from sell-side analysts. However, research in the Review of Quantitative Finance and Accounting showed between 1995 and 2013, following sell-side earning upgrades failed to generate significant returns. Additional research shows that analysts consistently overestimate earnings growth potential, and the higher their forecasts, the less accurately they reflect the subsequent real earnings growth.
Combining these insights, Tommy thinks investors should be selective about the research they consume; and, if we want to improve on unreliable forecasts, we should be more pessimistic. We must acknowledge that, when stock prices are aligned with sell-side earnings expectations, all other things being equal, the market is likely overpaying for expected earnings.
In practice, this means greater scepticism about some of the big market themes like e-commerce, said Tommy. Several stocks playing on this mega trend have the boldest sell-side assumptions when it comes to long-term earnings growth. Given what we know about the inaccuracy of exuberant earnings growth forecasts and just how badly things can turn for these sorts of companies, several of these stocks seem like prime candidates for some investor pessimism.
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Please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner
09/10/2020