Global equities: After the sell off …

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  • 11 mins 04 secs
At a time of reduced liquidity, a hawkish Federal Reserve and potential trade wars, the one certainty is that volatility is set to continue. Jacob de Tusch-Lec, manager of the Artemis Global Income Fund, talks to Artemis’ Ross Leckie about how he is positioning his portfolio in this environment.

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Yeah, i'm not least after october's big selloff, which, actually in the scheme of things, is pretty normal. That's what happens in bull markets. Investors air in an awkward position because on the one hand, there's lots to worry about on that's, well, rast, whether it's breaks it in the uk or trades tariff trumps are, on the other hand, earnings, for example, pretty good. There's still more fiscal stimulus from america, some points to be bullish about. So what in your portfolio you doing about this hard, you position yourself caught in this awkward antithesis. We've had two episodes of volatility this year, and they've both been ignited by this tightening into a slow, dying down paradigm. There is a lot of tension in the market, and there's no doubt that we're we're in a bit of a twilight zone right now. We can observe that it is very obvious. After a long period of very low rates, a lot off monetary stimulus, we now have a decent crowds global cycle. The u. S is growing very strongly. The rest of the world is slowing down. Rates have gone up in the us they've not gone up in the rest of the world, and there's a lot of uncertainty about trade wars and brexit in the uk and in general, a lot of things are coming to an end after sort of a decade post the crisis. So he's very obvious why investors are worried why higher rates lead to more volatility. So we can observe all that we're doing it and we're writing about it. And we're saying, well, it's not surprising that higher rates might put pressure on acid prices. What's really hard, though, is how you actually navigate that environment. And we've had some successes and some failures in that this year. Our view was, you don't want to be an expensive growth stocks because they have really been and pumped up by free money. You don't want to be in long duration assets because higher rates will punish that. Our view was that the economy was actually better than people thought. So we were hiding in value cyclicals. They come with a lot of other risks because they are cyclicals, and if there is a fear that growth is coming off, they get hurt. And that's what happened in october, which was a big disappointment to us. We are. She thought. We'd prepared for what happened in october and the frustrating, but is that the market punished us as badly as everything else. The whole growth value discussion is meaningless because growth stocks in the u. S would own eight percent and value sucks. But on seven percent what really mattered is it a cyclical industrial auto down ? Or is it the defensive and utilities and tell it goes and tobacco stocks for once were up ? So it was a big downgrade of growth expectations. We don't share that view, but we respected and we have to listen to the markets because prices have a certain information. So you step back from your bass towards value stocks. We've not done a lot. We've sort of observed, and it's been painful. But we we thought that there was not enough evidence that we are about to hit a wall globally. We can observe that in asia. Growth indicators have have leading indicators, especially have come down. But it's not yet excuse me. Recession. No, no, no. And the problem is that once the recession is, there's time to buy, not to sell. So you know this is about coincident indicators for looking leading indicators. They are coming off apart from pretty robust levels. And the one thing that really nags me is that i remember back in the beginning of sixteen after the fifteenth many recession we had globally in sixteen, the market's got very worried. Emerging markets sold off in the chinese, then really started pumping liquidity into the system. I appreciate right now is very different. We have a different fed, a different us president, a different relationship between china and the us back then, they cooperated. Now they're fighting. We have a different level of freedom or lack of freedom to do. Let's say pretty non conventional stimulus to the chinese economy. So they're less degrees of freedom now than there was in sixteen. But in sixteen markets turned when policymakers reacted. When we've seen in china's, there's been some signs of stimulus, and it takes two, three, four, five months to kick into the economy. So we've not really sort of yet pressed the button and sold our values cyclicals to buy tobacco stocks. But we have probably stepped away a little bit and are observing what's going on in questioning our positioning mohr. Then we did before because there is no doubt that trade wars a pretty hawkish fed liquidity being sucked out of the system, the probability off more volatility is just increasing. The value is his self evident yaakob you can buy at general motors on a piece of five time s s. So so there's some stock so much locum that go well if it's acute, if generally the global economy is sort of okay. So the problem by looking at pieces that they only look one year out. And if we have the market for once, is re forward looking. It does happen once in a blue moon, and it looks out two years. Well, that e in your p multiple. If that e hards, then things that trade of six, seven, eight, nine, ten times actually trading closer to twenty times. So that's one thing one has to then agree that that is going to have. We don't think that. But that can be the case for value signals. They are cyclicals for a reason. Margins compress, top line slows down and then your earnings out the window. That's one thing, thea other thing is also labor costs are going up everywhere globally. So we've had a period of ultra low rates. Accost off capital has been very low. That's going off. Cost of labor has been very little. That's going. Taxes have been low. They're going up. You know, there's enough. There's enough things to worry about, but that's always the case. One can worry about many things, but there is no doubt that the there are risks for the cyclical value stocks in our put for you, we can identify value. You mentioned gm at five times earnings. We think that's too cheap for a company that's still going to be around in ten, fifteen, twenty years with very little debt on the balance sheet. But we appreciate wides trading on five times but i think is the key question is here the downgrade to growth expectations, because what we're seeing in the us especially, is a very robust earning season. I get that is down to fiscal stimulus and tax reform. It might not be what you call high quality earnings growth, but nevertheless it's earnings growth, and we're still going to seymour. Effects from tax reform kicking over the next six months and then into nineteen is going to start tailing off in europe. The pictures less positive. But what we have in europe, of the more defensive companies or companies that exporting into areas that are doing better, and then we're quite underweight, sort of asean or emerging markets with debt levels are very high in where you're really going to have. I felt the impact of a stronger dollar and higher rates emerging markets down some twenty percent year today. That's one of the things that we've gotten right. I still think that we in this transition zone, where we're going from one regime to another and that comes with volatility, uncertainty and maybe the market gets it right and wrong. So i think we're trying to do as little as possible, but we have definitely not as convinced that we're right way, never convinced you're right. It's always a probability game, but i think we're looking at the numbers now, and our time horizon has come down, and we really need to see over the next month or two. A bit of a pick up in leading indicators, especially outside of the us. Otherwise, it becomes a bit self fulfilling. But ultimately and finally, yaakob. Yours is a global income fund, despite these men first difficulties, particularly choosing between the type of stop. Are you still finding stocks you want to buy with a sustainable and you growing yield on dh that have pretty son balance sheets and the prospects for growth within that particular business ? We're more than nine years interval market, so nothing is cheap and nothing is obvious. That's the first thing i'd say. We still have a part for you off income stocks from a global universe with good stories and some interesting investment feces and and where we think we can harvest a yield above three percent with a high level of certainty. Mm, i think the spread between very exciting growth stories and value stocks. The spread evaluation is pretty extreme, so we've decided to go down the value route. With that, you get a bit more cyclicality, a bit more business risk, but you have the cushion off that evaluations. We've also decided to a little bit down the cap scale in order to get some more stock specific, maybe special, sits kind of investments so we can move away from the macro world, which is very hard to predict right now. I don't think it's very easy having a macro thesis that's gonna play out with a high degree of certainty. But these will be self help stocks. Cellphones with leased, a decent element of self help turn around self help start but also just stocks that are linked to the business cycle, whether it za helicopter stock in italy, selling rescue helicopters to the chinese. That's not a macro story, so we can get companies that are sort of a little bit removed from the business cycle, thinking that our training at very high multiples but i will again say nine years into a bull market is very the high quality stocks out. The high quality companies are very expensive, so they might be the best companies in the world. But you don't have the cushion of safety, which we like to have in our income front. You also can't get the years you need. So it really is that balance, and it's a very, very tight balance. Tohave at a point where the business cycle might be might be tipping so interesting times, to put it mildly, a bit too interesting.

 

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