Portfolio Manager Rhynhardt Roodt reviews Q2 2019 for the Global Equity strategy and provides his outlook going forward.
My name is Rhynhardt Roodt and I am a Portfolio Manager for our Global Equity Strategy.
A sharp fall in equity markets in May was book-ended by much stronger returns in April and June, leading to an ultimately profitable, if somewhat volatile, second quarter of 2019 for most asset classes. Further signs of loosening monetary policy from central banks did provide some support to markets, notwithstanding ongoing trade tensions. US equities led the rally, reaching a new record high over the period despite the challenges faced in May. In general, all major developed equity markets managed to outperform equities across emerging markets as well as Asian markets.
The 4Factor screen was a marginal headwind for the quarter. What stood out, was the significant underperformance of Value relative to the other factors, which, after a very difficult 2018, makes this one of the longest and most pronounced losing streaks for Value on record. Against this backdrop, the portfolio marginally underperformed the index over the quarter yet remains well ahead of its benchmark year to date.
On the negative side of the ledger, stock selection within the energy sector did prove somewhat challenging, mainly driven by lower oil and gas prices, which affected our holding in oil and gas company Range Resources. A weak pricing environment and the absence of further asset sales to reduce relatively high debt levels continued to challenge the firm. We have recently engaged with the company and we will continue to monitor this investment very closely.
The US Justice Department also sent shock waves through the internet sector by announcing that it may investigate Google for hampering competition. Within the consumer sector, several retailers were caught out by a softening of trade conditions stemming from trade disputes between the US and China.
However, on the positive side, US backup power generator manufacturer Generac gained on the back of increased demand for its home standby generators, sparked by severe power outages in California. Both Microsoft’s and Spanish utility Iberdrola’s operational results continue to impress investors. Both these firms also benefitted from the hunt for stable growth businesses this past quarter. US pharmaceutical business, IQVIA Holdings, was a very strong performer as many analysts upgraded their medium-term growth forecast for the company.
In terms of outlook, the year started on a positive note, followed by a trickier second quarter. Value stocks are still underperforming despite being cheaper than at virtually any time in history. This reflects investors’ concerns over the growth outlook, with a clear favouring of those businesses with cash flows that are perceived to be more stable.
The market seems now to be prepared for a prolonged low growth, low inflation environment. However, the consensus is certainly not always rewarded. Some companies are clearly adapting to the changing environment amid further market volatility, driven by noise on global trade tensions and monetary policy.
Stock selection will be the key in this environment. We will remain disciplined in our process and continue to find opportunities to invest, which we believe is coming through already within our stock selection and portfolio construction.
The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth.
Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations.
Investment objectives and performance targets may not necessarily be achieved, losses may be made.
No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
Calendar year performance (%)
Strategy (Index*): 2018: -1.1 (-0.6), 2017: 16.2 (14.8), 2016: 4.4 (8.4), 2015: 10.3 (9.8), 2014: 12.3 (13.9)
Source: Investec Asset Management, 30 June 2019. Performance stated as gross of investment management fees in AUD. Gross income reinvested. *MSCI All Country World Index NDR (MSCI World NDR pre 01.10.10).