Q You said last year that prudent stock selection will be needed to separate the winners from the losers in 2019. How has the backdrop changed for investors?
The environment has not improved massively. We have been through an industrial recession across the world — albeit a mild one — which has created a host of obstacles for corporate earnings, particularly for more cyclical companies. Semiconductors, autos, chemicals and other industries have struggled. Fortunately, we have not been exposed in a large way to these parts of the market.
More positively, we’ve had a reasonable rebound in stock markets in 2019 and global equity prices overall are higher than they were at this point last year. Developed markets particularly have surprised somewhat to the upside.
Q What do investors need to keep an eye on as we head into a new year?
A key issue is what sort of stimulus we’ll see from the US Federal Reserve, which has started talking about quantitative easing of various kinds. But essentially, more money is being put into the system. The question is whether that extra liquidity will kick-start the global economy. If so, that could create a slightly better backdrop for corporate earnings growth, which slowed in Q3 and Q4 2019. Overall, we enter 2020 with a low base for earnings, a reasonably positive liquidity environment, and I think perhaps a slightly better environment for stock markets in general.
Q What are the major risks?
Geopolitics is still the big risk. Investors need to be aware of the potential for the cross-currents from events like the trade war to derail a prospective economic recovery. We’ve had yet another Brexit delay and it still isn’t clear how that story will pan out. And there is still no resolution to the US-China dispute, which appears to be spreading further and involving other countries.Another risk to watch is the gradual slowing in China. Its growth is hovering around 6%, which has always been Beijing’s policy goal. But given the size of the economy, it is going to be difficult for China to sustain that rate of growth.
Q How is your outlook influencing portfolio positioning?
We continue to invest in companies that we think have enough ‘self-help’ within their business models — in other words, that are less sensitive to the global economic cycle. Microsoft, for example, continues to grow in cloud computing. As a theme, I think cloud adoption by corporates will run for the next 3-5 years, irrespective of the economic cycle. Visa continues to grow at a double-digit pace in the payment space.
The key theme flowing through our portfolio is searching for companies that can drive their own earnings growth and that do not require investors to second-guess the growth cycle or currency movements.
Q What are the risks of that approach?
If you’re investing in less cyclically-sensitive businesses, there’s clearly a risk you’ll underperform if stock markets are very strong or the economy outperforms the cautious expectations that many people have at present. But the way we see it, that would be a small price to pay for what we hope would be resilient performance in a flat or more volatile market environment.
All investments carry the risk of capital loss.