The TAMIM Global Equity High Conviction Portfolio has managed to achieve impressive results since its inception. In fact, over one and three years, the underlying fund has outperformed the major Australian based international equity funds. This week we start our new monthly series ‘Running the Numbers’. The series aims to share with you what our VMQ framework and research is telling us about those sectors and countries that are attractive across global equity markets.
Running the Numbers Robert Swift - Head of Global Strategies - 03 May 2016 -
For an overview of how our stock ranking system works please read the article on our VMQ Ranking System.
April Numbers We are still finding considerable value within equities and we still believe that the greater risk is being out of the market. Generally, we can still find individual companies with good balance sheets yielding over 6% in a low inflationary world. With bond yields mostly below 2% - that's got to be worth a hard look? Bond yields have hit lows not seen in 400 years. Almost 30% of the world’s sovereign bonds, are trading at yields of zero or even negative rates. In such circumstances equity dividends yields that are secure and equity investments in business franchises that are defendable offer much better returns.
So in which styles, sectors and regions should you look? Growth, and safe stocks have outperformed “value” and small stocks by a wide margin in the last few years; as have USA based multinational companies. Is this about to unwind? Is it time to invest in “value” and cyclicals again? What about Europe and Asia?
High Value Score Over the last two years, investors have tended to focus on reliable growth stories, but recent data shows that “value” and cyclical type companies have tended to perform better. The last 3 months has seen a huge amount of market volatility and cross sectional volatility within the market. Banks and resource stocks got smashed and then rose strongly in February and fell back again in March. Is this a sign of a “point of inflexion”? Are investors overpaying for USA stocks; ‘growth’ stocks; ‘safe’ stocks? And is the market volatility telling us these stocks are beginning to rollover?
Check out the graphic below showing the score of companies by value, momentum and quality which acts as a visual tool to identify those sectors and regions where we (and you) should look to invest, or avoid.
Our numbers show that the sectors that score best for this type of environment right now are Transport, Telecoms, Technology hardware & equipment and Utilities. Consumer Durables and Energy rank at the bottom end of our scale. Some of these sectors are unfashionable having performed poorly. The VMQ framework forces us to look at companies in those sectors; the best investment can often be the least fashionable. Within these we are focused upon sustainable earnings; taking care that balance sheets are in good shape; and that equity dividends are payable and paid.
Recent purchases of Bank of Montreal for example gave our clients exposure to the Canadian dollar and oil and gas loans which had been very unpopular as commodity prices fell. Randstad, a recent purchase in Europe, is a leading employment agency and we anticipate a better outlook for job growth on a year over year comparison.
Over the last couple of months we have been slowly positioning the portfolio for an outperformance by lower P/E, more volatile stocks. We believe that relative valuations within the global equity universe now strongly favour the beaten up cyclical stocks with the expectations built into safe stocks leading to relative valuations that are historically very stretched. In short – equity investors have been scared and are now too defensively positioned. It’s time to begin to take the opposite stance.
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