present
Economic uncertainties continue into year-end 2024, with consumer spending trends and rate cuts setting the tone for investors
Key themes for the remainder of 2024
Schroders’ Simon Adler discusses global equities from his perspective as a value investor – including the importance of maintaining style discipline
Value investing: Staying disciplined in changing markets
When the Best Styles franchise was launched in 1999, not everyone was convinced of the simple but bold idea of taking academic financial markets research and turning it into an investment strategy. 25 years on, we explore an investment and business success story
Data-driven success: 25 years of Best Styles – multifactor investing
Cormac Weldon, Artemis’ head of US equities, and manager of the Artemis US Select Fund outlines the policy differences between the two presidential candidates. He prefers to look beyond the election and invest in longer-term themes
US equities ahead of the election: tax, tariffs and (red) tape…
Investors might need to reassess how they position their portfolios if inflation falls back over the course of this year and next
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Opportunities in industrials: What's shaping the sector?
Natasha Ebtehadj delves into the detail of policy announcements from Beijing to see whether they are really enough to kick-start a prolonged recovery in the Chinese stock market
Have recent stimulus measures made China investable again?
Malie Conway of AllianzGI talks to Dr Michael Heldmann about the advantages of factor investing, exploring how strategies like value, trend-following, and quality investing can perform across different stages of the business cycle
Exploring the benefits of factor investing with Dr. Michael Heldmann
Global equities
With a soft-landing for the US economy on the cards; inflation on a downward path in Europe, and modest earnings growth at scale - where should investors go for the best opportunities in global equities?
Click an article to start exploring Hover over images for details
With impressive market growth raising valuation concerns, Jacob de Tusch-Lec explores overlooked opportunities in banking, energy, and defence, demonstrating where value can still be found
Despite runaway growth, the world is still quite cheap – if you know where to look
Tom Walker discusses his approach to identifying prime listed real estate investments, the sectors with the strongest growth potential, and the importance of sustainability
Investing in the future of global real estate
Factor investing: a core investment strategy for portfolio stability
Dr. Michael Heldmann discusses the challenges of building a successful equity portfolio
Consumer staples: More diverse than investors realise?
Guinness Global Investors on the underlying drivers of consumer staples and how current market conditions are impacting the outlook
What does a Trump win mean for the energy transition?
Mark Lacey and Alex Monk consider how Donald Trump’s victory in the US election will test the renewable sector’s adaptability and resilience
Emerging markets: key questions from investors
Chinese stimulus has sparked renewed interest in emerging markets. Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity Fund, addresses some key client questions
What might a Trump presidency mean for markets and the economy
A Trump presidency could usher in profound shifts across global markets and the economy – and investors must balance growth opportunities with inflationary pressures
Avoiding the hidden risks - A more active approach to factor investing
Factor investing has become a prominent approach in the investment world, supported by extensive academic research
Malie Conway of AllianzGI talks to Dr Michael Heldmann about the advantages of factor investing, exploring value, trend-following, and quality investing strategies
Five takeaways on the potential rewards and risks facing global equity investors
Increased market breadth and volatility against a resilient economic backdrop should create opportunities for active fund managers
Why AI is an important element of the Best Styles approach
Dr Michael Heldmann delves into the history of the Best Styles strategy’s fundamental milestones and its evolution over time
Global equity income – is a change in regime on the cards?
Monetary policy is finally shifting and inflation is coming under control. For investors, this means a wealth of new opportunities in overlooked areas, according to Artemis’ Jacob de Tusch-Lec
The data which can help you keep a cool investing head in a crisis
Four bite-sized pieces of research showing investors are best served not making decisions in the heat of the moment
Why investors shouldn’t try to second-guess election results
Alex Stanić on while he isn’t adjusting his portfolio based on who he thinks will end up in the White House, this doesn’t mean he is ignoring the presidential race entirely
25 years of steady resilient returns in turbulent times: Best Styles
When factor investing was still a novel and emerging concept, Allianz developed Best Styles – an active and risk-controlled equity strategy aiming to provide stable outperformance. Here we explore its resilience through 25 years of crises
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The late 1990s marked the peak of the dot-com boom, characterized by a speculative surge in technology and internet related stocks. Investors flocked to these companies, creating an environment of exuberance and inflated valuations. Growth investing flourished during this period, emphasizing companies with high growth potential, often at the expense of traditional valuation metrics. The speculative fervour led to inflated valuations, particularly in the NASDAQ Composite Index, reaching record highs in 2000. Despite the challenges that value Investing faced in the run up to of the dot-com bubble as traditional metrics were often overlooked in the speculative environment, Best Styles achieved a 3%-outperformance from December 1998 through March 2000. The bursting of the dot-com bubble in the early 2000s triggered a market correction. Investors shifted focus from speculative growth to more grounded investment approaches, signalling the resurgence of value investing. Central banks globally implemented measures to stimulate economic recovery, value stocks gained traction, embodying companies with solid fundamentals and reasonable valuation. Best Styles, due to its diversified and rather defensive positioning, strongly outperformed in the calendar years 2000 through 2002 also capitalizing on the value rally. In the strong market rally beginning March 2003, however, the more defensive positioning was unhelpful and turned out to be a drag on relative performance. Once adjustments were made, Best Styles portfolios kept participating in the ongoing value rally, leading to a steady outperformance from 2004 to 2007.
1. From dot-com peak to dot-com bust
The global financial crisis of 2007-2008 triggered a series of events that shook financial markets and challenged various investment strategies. Among them was the “quant meltdown” of August 2007, which affected quantitative, or “quant”, hedge funds and trading strategies that used similar models and high leverage levels. These funds faced a sudden and severe market sell-off, as some of the stocks they favoured most due to their exposure to multiple factors plunged in price. While many quant investors had to learn the lesson about the importance of “factor overlaps” the hard way, the Best Styles team already controlled the exposure to these so-called super stocks before the “quant meltdown” and escaped largely unscathed. At the time many factor investors used value definitions either tilted towards cyclical (e.g. price-to-book) or defensive (e.g. dividend yield) value leading to overweighs in value traps like Financials or highly cyclical stocks, a bad idea during a global financial crisis and recession. Best Styles avoided these value traps by highlighting value factors that take company debt into account (e.g. EV/EBITDA) and thereby penalize highly indebted companies. In addition, Best Styles applied a recession-adjusted stock valuation favouring defensive over cyclical stocks. The increased demand for high quality stocks in combination with an overweight in stocks with high earnings stability supported the performance of Best Styles portfolios further and led to an outperformance in 2008. The recovery period, starting in March 2009, was marked by extraordinary monetary stimulus measures from central banks to stabilize the financial system and support the economic recovery. While Best Styles could not capture all of the rapid recovery at first, its barbell structure, with a simultaneous allocation to highly cyclical as well as very defensive stocks, was the key to the stable outperformance around the market turnaround in 2009.
The Eurozone crisis in 2010-2012, marked by concerns about sovereign debt, led to a challenging environment for both value and growth investing. The Eurozone crisis exposed the interconnectedness of global financial markets, impacting investment strategies and prompting a reassessment of risk exposures. Central banks implemented unconventional monetary policies, including very low-interest rates and quantitative easing, to stimulate economic growth. At the end of 2011 stock markets began a recovery, and some indices reached new highs. Best Styles fared well during the Eurozone crises, performing better than its benchmark in 2010 and 2011 and almost flat in 2012. Despite the general market recovery in the early 2010s, value was about to go through an extended, almost decade long, period of underperformance relative to Growth, leading market participants to question the definition and some even the existence of the value factor. Some argued that the value factor was obsolete or even dead, citing structural changes in the economy, such as the rise of intangible assets, the dominance of technology companies, and the impact of low interest rates. Others contended that the value factor was still valid but needed to be redefined or adapted to account for the changing market conditions and valuation metrics. Yet others noted the historical context and the empirical observation that extended periods of underperformance had occurred before and viewed the value underperformance as an opportunity rather than its demise. During this time the diversified investment style mix implemented in Best Styles portfolios again paid off as the non-value investment styles (over-) compensated the weakness in Value. Best Styles outperformed in all calendar years from 2010 through 2015 except 2011 with a very minor underperformance.
2. Global financial crisis: Navigating agitated markets with a winning strategy
3. Eurozone crisis: Best Styles’ diversified investment style mix pays off
The outbreak of the COVID-19 pandemic in 2020 marked a significant inflection point. Governments worldwide implemented widespread lockdowns to contain the virus, resulting in a substantial economic contraction and a sharp stock market decline in March 2020. Value stocks as a cyclical equity exposure, faced challenges early in the pandemic and experienced significant declines as economic uncertainties and lockdowns affected industries like travel, hospitality, and energy. Growth stocks in contrast, particularly in the technology and healthcare sectors, outperformed. The pandemic accelerated trends favouring companies with strong digital presence, innovative technologies, and resilient earnings. Fiscal stimulus measures together with central banks globally cutting interest rates contributed to a rapid recovery. The underperformance of Best Styles in 2020 was mainly due to the underperformance of value caused by the negative COVID-19 impact on Value-heavy industries and in addition its adverse macroeconomic exposures due to weaker economic growth, lower interest rates and rising corporate spreads. The vaccine announcement early November 2020 caused a “Momentum” crash resulting in a strong underperformance of trend following styles compensated only partially by the bounce back seen for Value.
4. COVID-19 pandemic and its paralysing and catalyst effects
The post-pandemic rebound in 2021-2022, fuelled by vaccine distribution and economic reopening efforts, led to a strong recovery of the market which Best Styles captured and supplemented with strongly positive outperformance over the years 2021 and 2022. Both value and growth investing found opportunities in this dynamic environment, with continued focus on navigating uncertainties, including inflation concerns, supply chain disruptions, and changes in monetary policy. Value investing benefited from opportunities in sectors poised for recovery, while growth investing continued to demonstrate strength, especially in technology and innovation areas such as electric vehicles, renewable energy, and biotechnology. In 2023 Best Styles further added to this outperformance despite mixed performances of the investment styles and thanks to the strategy’s risk management measures. These included a balanced approach within value between cyclical and defensive value signals in the context of Quality as well as neutralizing non-rewarding risk factor exposures (e.g. macro risks) in the portfolios. With the results of the last three calendar years (2021 to 2023), the team has successfully made up for the unfavourable results during the Factor Winter and is working on further expanding the good performance results in 2024.
5. Post COVID-19: the recuperation rally
Exhibit 1: 25 Years Best Styles Global vs MSCI World
GIPS-compliant composite performance since inception (12/1998)
MSCI World TR Net (left hand scale)
Cumulated relative performance (right hand scale)
Best Styles Global Dev. Equity (left hand scale)
Source: Performance data for composite and benchmark based on official data from IDS as of 31/08/2024, in EUR, graphical presentation by AllianzGI.Past performance does not predict future returns. Figures gross of fees. AllianzGI Best Styles Global Developed Equity Composite performance inceptiondate: January 1, 1999. The performance shown above is gross and does not reflect the deduction of investment advisory fees.
“The late 1990s marked the peak of the dot-com boom, characterized by a speculative surge in technology and internet related stocks. Investors flocked to these companies, creating an environment of exuberance”
“At the end of 2011 stock markets began a recovery, and some indices reached new highs. Best Styles fared well during the Eurozone crises, performing better than its benchmark in 2010 and 2011 and almost flat in 2012”
Back in 1996, when factor investing was still a novel and emerging concept, a small group of people at Allianz Global Investors developed Best Styles – an active and risk-controlled equity strategy aiming to provide stable outperformance. We explore its resilience through 25 years of crises
RETURN TO HOMEPAGE
GLOBAL EQUITIES
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Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Allianz Best Styles Global AC Equity Fund is a sub-fund of Allianz International Investment Funds, an open-ended investment company with variable capital with limited liability organised under the laws of England and Wales. The value of the units/shares which belong to the Unit/Share Classes of the Sub-Fund that are denominated in the base currency may be subject to an increased volatility. The volatility of other Unit/Share Classes may be different and possibly higher. Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The Management Company may decide to terminate the arrangements made for the marketing of its collective investment undertakings in accordance with applicable de-notification regulation. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. For a free copy of the sales prospectus, incorporation documents, daily fund prices, Key Investor Information Document, latest annual and semi-annual financial reports, contact the management company Allianz Global Investors UK Limited in the fund’s country of domicile, the UK, or the issuer at the address indicated below or regulatory.allianzgi.com. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors UK Limited, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited, company number 11516839, is authorised and regulated by the Financial Conduct Authority. Details about the extent of our regulation are available from us on request and on the Financial Conduct Authority's website (www.fca.org.uk). For a free copy of the sales prospectus, incorporation documents, daily fund prices, Key Investor Information Document, latest annual and semi-annual financial reports, contact the issuer at the address indicated below or regulatory.allianzgi.com. Please read these documents, which are solely binding, carefully before investing. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors.
Q: Where is factor investing is going, and what are its major challenges and opportunities?
Michael: Best Styles is a time-tested investment solution to create a core equity exposure. Over 25 years we have demonstrated that the focus on extracting risk premia, with a keen eye on managing unwanted risks, can add value for investors. And the steadiness of the concept over time means that its success achieved in the past is very relevant for investors going forward. The highly diversified nature of Best Styles, both in terms of the number of stocks but also in terms of sources for excess returns, provides a consistency that many investors seek. We believe that with Best Styles we have created and enhanced over time an investment solution that has not only delivered in the past but is also fit for the future.
Michael: The concept will remain just as relevant as it has been for the past 25 years. The basic idea that investors can choose to take on additional risks for additional returns will remain an essential long-term mechanism in capital markets and will therefore also be a viable strategy to reap excess returns in the future. Looking at the next 5 to 10 years, I expect that there will be further developments on how to identify risk-premium bearing companies, certainly also by incorporating more and more information into investment selection and risk management (that is, to find out where the highest premium can be had for the least amount of additional risk). AI and its sister topic alternative data will likely play an even greater role here in the future than they do at present.
Q: To summarise, how would you like investors to look at Best Styles and its 25-year history?
Michael: Often, a difficult decision for a process-driven manager is centered around finding the balance between the stability of the process and a constant need to evolve. Stability leads to faith in reproducibility and to a situation where a track record can be indicative of future performance. Without stability, this connection between the past and the future may not be valid any longer. At the same time, I believe one cannot follow a completely static model, since there is a need to deal with constant, sometimes structural change in markets. Hence, one needs to find a balance between continuity and innovation. For Best Styles, we have made the conscious decision to adhere to the basic concepts of the strategy for the long run. These include the beliefs that risk premia are key in understanding market returns, that the five investment styles we exploit (Value, Momentum, Revisions, Growth, and Quality) are the main drivers of excess returns, and that portfolio construction is a key ingredient for a successful strategy. At the same time, it is clear that the “details” of how we find value stocks, stocks with a strong trend, or high-quality companies, need to be adapted and improved over time. Obvious reasons why include the availability of new data sources or methods. We strive to incorporate all possible improvements as early as possible, often being a pioneer in the field (like, for example, in the area of AI). More subtle reasons include changes in the way the market prices certain risks. There are times, for instance, when the financial leverage of a company might be perceived as risky, while at other times it might be perceived as a necessary tool to boost the bottom line. This makes it necessary to regularly review and evolve the definition of value, for example according to the market’s risk perception. Hence, knowing where and when to be dynamic and where and when to prefer stability is key to a successful quantitative product.
Q: What have been particularly difficult decisions and why?
Michael: We have been using AI in the form of machine learning since 2007, including it as a complement to classic methods such as linear regression. Such usage will continue to be an important element of our approach. Another very exciting area is the use of AI to generate insights from unstructured data. Take, for instance, Natural Language Processing (NLP), which we have been working on very intensively over the past decade and which we have been using very successfully. To give just an example: we convert earnings call transcripts into information that can actually be used for portfolio construction. But despite all the hype around AI in the media, it is important to note that in the financial sector, the amount of data is not large enough to build complex AI models using techniques such as those employed by ChatGPT, for instance. It will always require the expertise of a quantitative investment expert to guide and train the AI model. Ultimately, when using AI for investments, modern technology assists (but does not replace) the human mind. We call this approach “man and machine”.
Q: You mentioned AI as an example. In how far is this already part of Best Styles and are you working on integrating further innovations in that regard?
Michael: Our investors are generally result-oriented and, as such, the stable and consistent outperformance over time is top of the list here. Clients also really appreciate the flexibility that Best Styles offers them to target their individual needs. Increasingly popular examples include, of course, sustainable investment solutions like Best Styles SRI (Sustainable and Responsible Investments), where in recent years we have been able to win new clients and to help existing ones meet their extended set of goals. Our income-oriented Global High Dividend strategy is another example where a client-specific solution grew into a successful global product offering.
Q: Looking back at 25 years of Best Styles performance, what do investors appreciate the most about Best Styles in your opinion?
Michael: The integration of sustainability into Best Styles has been exceptionally smooth. With data being at the core of Best Styles, the increased availability of sustainability-related data has made our approach uniquely adept at reliably and robustly incorporating sustainability considerations into our analytical framework. Best Styles has been successfully extended to objectives such as CO2 reduction, improved sustainability ratings or exposure to SDGs (Sustainable Development Goals).
Michael: Our success is built on the deep belief in our investment philosophy, understanding that risk premia provide a reliable sources of excess returns. To build a truly diversified core portfolio we need three essential ingredients: companies with attractive valuations, those with strong trends in share price, earnings or other important financial metrics, and highly resilient companies measured by their financial and industry position, often called high-quality companies. But these three elements are not enough in order to manage a portfolio successfully through multiple economic and market cycles. They have to be combined in a comprehensive way using sophisticated risk management and portfolio construction techniques. What sets us apart is our dedication to these principles, despite significant market turmoil from time to time, combined with continuous investment in research to improve our methods, and a commitment to cover an ever-increasing quantity of data. Furthermore, artificial intelligence, machine learning and alternative data have played and will play an important part in keeping our edge as well.
Q: Can you explain the integration of sustainability aspects into the approach? How adaptable is the approach?
Q: As the Best Styles strategy celebrates its 25th anniversary, what has been key to its enduring success?
“Our investors are generally result-oriented and, as such, the stable and consistent outperformance over time is top of the list here. Clients also appreciate the flexibility that Best Styles offers them to target their individual needs”
Dr Michael Heldmann, CIO Systematic Equity
CONTRIBUTOR
Dr Michael Heldmann, CIO Systematic Equity, delves into the history of the Best Styles strategy’s fundamental milestones and its evolution over time, as well as its ongoing development and the successful incorporation of artificial intelligence
Important information FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus, available in English, and KIID/KID, available in English and in your local language depending on local country registration, from www.artemisfunds.com or www.fundinfo.com. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed. Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund. Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them. For information on sustainability-related aspects of a fund, visit www.artemisfunds.com. The fund is an authorised unit trust scheme. For further information, visit www.artemisfunds.com/unittrusts. Third parties (including FTSE and MSCI) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any statements are based on Artemis’ current opinions and are subject to change without notice. They are not intended to provide investment advice and should not be construed as a recommendation. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
I came across an old Polish proverb recently: “Not my circus, not my monkeys!” It is a useful way of saying something is not your problem so you are not getting involved. The election in the US is often called a political circus. Whether it is as entertaining as a normal circus is another matter. But it is not mine and I am not glued to my computer each morning avidly monitoring the news flow around it. This ambivalence may come as a surprise to those who want to know how investors might shape their portfolios to benefit from a Democrat or Republican victory in the White House and Congress. It does not mean we are ignoring what is happening. Elections kick up opportunities without you having to be a psephologist or Mystic Meg.
First, a reminder of why it is risky to make big investment decisions on election result forecasts. This is the year that half the world goes to the polls, and if we have not learned already from Donald Trump’s initial victory and Brexit about the power of elections to surprise, just look at some of the big political stories of 2024 so far. In India, after a six-week process, the 640-million-strong electorate shocked the world when they severely curtailed Prime Minister Narendra Modi’s power, forcing him – 63 seats down – to form a coalition government. Mexico went the other way, giving the ruling party a landslide victory and supermajority that could enable it to change the constitution, causing initial panic in the markets. And then there was France, where one moment it looked like Marine Le Pen’s far-right party might win power, only for the left and centre to rally.
Elections are unpredictable
Artemis Global Select’s Alex Stanić says that elections often create opportunities for investors – but not in the way most people think.
Even if you correctly anticipate the result of an election, there is the small matter of how what was said on the stump translates to actual policy. This is particularly the case with Donald Trump, who, for instance, is threatening a 10% tax on all imports and possibly as much as 60% for China. But his proposals change with his mood. Even when the president decides what they are going to do, they need the backing of the Senate and Congress. Obama was a popular president for much of his time in office, but he struggled to get any of his policies enacted. There are few foregone conclusions. So it would be foolish in these circumstances to invest on this kind of speculation. We might, for instance, buy shares in US-based solar panel manufacturers, on the basis that tariffs on Chinese imports will finally make them competitive. But if these companies are unprofitable without tariffs, then why would I want them near my portfolio – especially when those tariffs look so uncertain? As a global manager, I have many companies that are much better run to consider. This is not to say that politics is irrelevant. There are issues like regulation, for instance, that may pose a challenge to some companies. Think of Meta and allegations that its platform was misused to influence the previous election. Or consider the monopoly powers some of the tech mega-caps now have. Regulators may come after them at some point. And the regulators themselves are often directed from Washington. But such big threats should always be a consideration for long-term investors – not something you think about because an election is imminent. You might think the same of international companies. The US has a monthly $20bn trade deficit with China . Its deficit with Mexico hit a record $4.7bn in March . A big hike in trade tariffs could affect certain companies in these countries. But these are threats we consider whenever we buy shares.
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Promises don’t equal policies
Of course, not everyone subscribes to this approach. And here is where opportunities arise. In June, during the French election, shares in the French construction company Vinci fell nearly 15% in a fortnight on fears that a Le Pen government would renationalise toll roads – a major source of its income. We thought the concerns were overly discounted in the valuation and bought the shares. Even if the roads were brought under government control, we took the view that Vinci would be compensated – this is not Russia, where one might be more concerned about state appropriation. Similarly, US elections can present challenges for pharma and health insurers. There is usually speculation that a change of government will result in stricter regimes and cost controls. In the US, we have been able to add to our positions in UnitedHealth Group and Elevance Health more recently in a similar way. As speculation mounted that Joe Biden would stand aside for Kamala Harris, throwing Trump’s likely victory back into serious doubt, shares in Elevance sank nearly 10% – but they have already recovered . Too often, as a fund manager, I find companies whose shares I would like to buy if only they were cheaper. Sometimes election volatility creates the opportunity to do just that.
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Sources 1, 2. taxpolicycenter.org 3, 4. ipr.transitionmonitor.com 5, 6. Bloomberg
Opportunities amid the volatility
“The election in the US is often called a political circus. Whether it is as entertaining as a normal circus is another matter. But it is not mine and I am not glued to my computer each morning avidly monitoring the news flow around it”
Alex Stanić, Head of Global Equities
Alex Stanić of the Artemis Global Select Fund says that while he isn’t adjusting his portfolio based on who he thinks will end up in the White House, this doesn’t mean he is ignoring the presidential race entirely
Higher inflation, wage growth, and the reshoring of supply chains will continue to reshape the economic landscape, demanding a more flexible and dynamic approach to generating income – investors may no longer be able to rely solely on traditional sectors to provide steady returns. Instead, they must adapt to the new environment and, according to de Tusch-Lec, investors who embrace this new regime will likely find more sustainable income opportunities.
Source 1. Artemis as at 31 August 2024
The changing regime
When it comes to equity income investing, the last two decades have been characterised by low interest rates and subdued inflation. However, with inflation now structurally higher and monetary policies shifting, investors are rethinking their strategies. In a world of higher rates, bond proxies are becoming less attractive. Traditional income sectors such as utilities and real estate have underperformed, while new opportunities have emerged in sectors that were previously considered too volatile or cyclical for income investors. So, is it time to re-evaluate the traditional approach to equity income investing?
According to Jacob de Tusch-Lec, fund manager at Artemis, a ‘regime change’ is afoot and, instead of relying on the ‘usual suspects’ for income growth, investors need to look for opportunities in areas historically overlooked or avoided. “If you want to outperform or even keep up with the market, you can’t run an income fund in a traditional way," he explains. While sectors like utilities, real estate, and healthcare have struggled in the face of higher interest rates, the Artemis Global Income Fund, managed by de Tusch-Lec, has pivoted toward sectors better positioned to benefit from the current economic climate – such as industrials and technology. The strategy of diversifying away from bond-proxy stocks has also paid off, with the fund consistently outperforming the MSCI World index.
“Looking at the last 12 months, performance has been driven by exposure to defence companies,” says de Tusch-Lec, noting that three out of the top five performers in his fund are defence firms. This, he suggests, is part of a broader shift in the income investment landscape. “Everything we have experienced over the last 20 years is being rolled back,” he says. “Defence has not been a great performer over the last 20 years but is incredibly relevant now.” He also notes that bank stocks have performed well. “We’ve made money in a number in European banks, especially to southern Europe, where banks have benefitted from higher rates and quite strong economies.”
Adopting a contrarian approach
Gains in defence and banking
Another area of opportunity, according to de Tusch-Lec, is the Japanese market. The Bank of Japan has finally abandoned its ultra-loose monetary policy, signalling the end of an era dominated by deflation and retreating markets. Corporate governance reforms have also gained traction, compelling firms to better align with shareholder interests and focus on board accountability. These changes are pushing companies to improve returns on equity, enhance capital structure, and unlock shareholder value. As such, Japan now presents a key opportunity for income investors seeking diversification and resilience in a structurally higher inflation environment. The Artemis Global Income Fund, for example, has taken advantage of this shift, with the fund’s exposure at 15%.
New opportunities in Japan
The technology sector has long posed a challenge for income-focused investors. The ‘Magnificent Seven’ tend to reinvest heavily in growth rather than return capital to shareholders through dividends. This makes it difficult for traditional income funds to hold a meaningful position in tech stocks without compromising their income objectives. "With tech being such a big part of the investment universe and with the big tech stocks not really having dividend yields that can make us buy them, the investment universe is sinking," notes Jacob de Tusch-Lec, manager of the Artemis Global Income Fund. However, he adds that there are alternate ways to gain exposure to themes like AI and semiconductors through companies that do pay dividends – an approach that allows investors to maintain exposure to the tech revolution without sacrificing its income strategy.
The problem with tech
“Traditional income sectors such as utilities and real estate have underperformed, while new opportunities have emerged in sectors that were previously considered too volatile or cyclical for income investors”
Jacob de Tusch-Lec, fund manager
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The stock market’s “fear gauge”, the Vix index, has reached new highs in recent days as investors feared a weakening US economy, among other worries. The Vix is a measure of the amount of volatility traders expect for the US S&P 500 index during the next 30 days. It last reached a signiicant peak in May 2022, in the aftermath of the invasion of Ukraine. However, historically, it would have been a bad idea for investors to sell out during periods of heightened fear. We looked at a switching strategy, which sold out of stocks (S&P 500) and went into cash on a daily basis whenever the Vix was above 30, then shifted back into stocks whenever it dipped back below. This approach would have returned 7.4% a year (ignoring any costs) and underperformed a strategy which remained continually invested in stocks, which would have returned 9.9% a year, again excluding costs.
A $100 investment in the continually invested portfolio in January 1990 would have grown to be worth more than 2.5 times as much as $100 invested in the switching portfolio. As with all investment, the past is not necessarily a guide to the future but history suggests that periods of heightened fear, as we are experiencing at present, have been better for stock market investing than might have been expected.
4. Periods of heightened fear have been better for stock market investing than might have been expected
Using almost 100 years of data on the US stock market, we found that, if you invested for a month, you would have lost money 40% of the time in inflation-adjusted terms.
1. Stock market investing is very risky in the short run but less so in the long-run – unlike cash
However, if you had invested for longer, the odds would shift dramatically in your favour. On a 12-month basis, you would have lost money 30% of the time. Importantly, 12-months is still the short-run when it comes to the stock market. You’ve got to be in it for longer to benefit most. On a five-year horizon, that figure falls to 22%. At 10 years it is 13%. And there have been no 20-year periods in our analysis when stocks lost money in inflation-adjusted terms. Losing money over the long run can never be ruled out entirely and would clearly be very painful if it happened to you. However, it is also a very rare occurrence. In contrast, while cash may seem safer, the chances of its value being eroded by inflation are much higher. And, as all cash savers know, recent experience has been even more painful. The last time cash beat inflation in any five-year period was February 2006 to February 2011, a distant memory. Nor is that something that’s expected to change any time soon.
How can fixed income investors navigate the complexities of climate transition? Can bondholders really make a difference to this real world issue?
Taking world stock markets (as represented by the MSCI World Index) 10% falls happened in 30 of the 52 calendar years prior to 2024. In the past decade, this includes 2015, 2016, 2018, 2020 and 2022. More substantial falls of 20% occurred in 13 of the 52 years (that's roughly once every six years – but if it happens this year, that will be three times in the past four years, in 2020 and 2022).
Despite these regular bumps along the way, the US market has delivered strong average annual returns over this 52 year period overall. The risk of near term loss is the price of the entry ticket for the long term gains that stock market investing can deliver.
2. 10%+ falls happen in more years than they don’t – but long-term returns have been strong
While the market hasn’t fallen too much so far, further volatility and risk of declines cannot be ruled out. If that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash. However, our research shows that, historically, that would have been the worst financial decision an investor could have made. It pretty much guarantees that it would take a very long time to recoup losses. For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, would have had to wait until 1963 to get back to breakeven. This compares with breakeven in early 1945 if they had remained invested in the stock market. And remember, the stock market ultimately fell over 80% during this crash. So, shifting to cash might have avoided the worst of those losses during the crash, but still came out as by far the worst long-term strategy. Similarly, an investor who shifted to cash in 2008, after the first 25% of losses, would find their portfolio still underwater today. The message is overwhelmingly clear: a rejection of the stock market in favour of cash in response to a big market fall would have been very bad for wealth over the long run.
3. Bailing out after big falls could cost you your retirement
“The last time cash beat inflation in any five-year period was February 2006 to February 2011, a distant memory. Nor is that something that’s expected to change any time soon”
“While the market hasn’t fallen too much so far, further volatility and risk of declines cannot be ruled out. If that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash”
Past performance is not a guide to the future and may not be repeated. Note: Levels in excess of 33.2 represent the top 5% of experience for the VIX. Portfolio is rebalanced on a daily basis depending on the level of the VIX at the previous close. Equity index is S&P 500, cash is 30-day cash. Data to 6 August 2024. Figures do not take account of any costs, including transaction costs. Source: CBOE, LSEG Datastream, Schroders
Growth of $100 fully invested in stocks vs switch to cash when VIX high
Fully invested
Move to cash whenever VIX>33.2
Large cap stocks
Cash
1-month
3-months
12-months
3-years
5-years
10-years
20-years
Past performance is not a guide to future performance and may not be repeated. Source: Stocks represented by Ibbotson® SBBI® US Large-Cap Stocks, Cash by Ibbotson® US (30-day) Treasury Bills. Data to December 2023. Morningstar Direct, accessed via CFA institute and Schroders.
Percentage of time periods where US stocks and cash have beaten inflation 1926-2023
Past performance is not a guide to the future and may not be repeated. Source: LSEG Datastream and Schroders. Data to 31 December 2023 for MSCI World index in USD terms
Biggest stock market falls in each of the past 52 calendar years, MSCI World (USD)
1.8 4.0 1.1 1.2 1.5 15.2 0.8 2.0 1.5 4.1 4.8
6.9 6.2 6.2 8.8 6.3 34.0 5.0 5.3 4.3 22.8 Still underwater
1877
1893
1903
1907
1917
1929
1970
1974
1987
2001
2008
‘Dash for cash’ once market has fallen 25%
Past performance is not a guide to the future and may not be repeated. Source: Federal Reserve Bank of St. Louis, Robert Shiller, Schroders. Monthly cash return 1934-2024 based on 3-month Treasury bill, secondary market rate; 1920-1934 based on yields on short-term United States securities; 1871-1920 based on 1-year interest rate. 1871-1920 data only available annually so a constant return on cash has been assumed for all months during this period. Other data is monthly. All analysis is based on nominal amounts.
Number of years to recoup initial losses if sell out after a big fall
Stick with stocks
Duncan Lamont, CFA, Head of Strategic Research, Schroders
Click on the arrows to show the other half of the chart
1-mth
3-mths
12-mths
3-yrs
5-yrs
10-yrs
20-yrs
The euphoria around generative AI has been a major driver of share price growth in markets over the past year. Investors have flocked to some of the clear beneficiaries in the semiconductor and data centre segments of technology. However, revenue from AI is running near a level that is estimated at 10x less than the amount of capital expenditure currently being spent. As a result, there are questions about whether there is enough near-term future revenue to justify the current level of infrastructure buildout. These uncertainties contributed to the Big Tech stocks bearing the brunt of the de-rating in the US equity market during the August market correction. The ability of these tech companies to monetise their AI spending will remain an important theme. We are fully aware that generative AI remains early in its innings and that the development of this technology holds huge potential to transform businesses and productivity. However, it is now facing greater scrutiny around the level of power consumption, supply constraints and the pace of revenue growth. There are also questions around whether we are seeing an overbuild that will require a consolidation phase for AI infrastructure related stocks.
5. Increased scrutiny around AI monetisation
This has allowed the European Central Bank and Bank of England to begin cutting interest rates. Economies such as the UK and Spain have a high percentage of floating rate mortgages and a decline in interest rates will provide some immediate support to the consumer. We are also seeing higher real wage growth in Europe and the UK, which combined with excess savings, should further support consumption growth. The August market correction saw a de-rating in equities to reflect a more uncertain outlook for the US economy, but they have quickly recovered losses, supported by good earnings growth and the outlook for easier monetary conditions. Equity markets were vulnerable to a correction after a very strong nine months, but company fundamentals are decent and heightened volatility creates opportunities for repositioning where dislocations occur.
Based on commonly used metrics, the UK remains one of the most attractively valued markets globally relative to its long-term history. In global equity markets, valuations continue to favour ex-US markets, particularly the UK, Japan, and emerging markets (EM) (see table, below).
However, valuations in the US market looks less demanding when you look beyond the “Big Tech” mega-cap growth stocks, which are dragging up the overall P/E multiple of the S&P 500. The Big Tech stocks have, in aggregate, benefitted from both relevant thematic exposures and strong fundamentals. In contrast, the reminder of the market has been contending with a still tough operating environment, which has dampened top- and bottom-line growth for much of this time.
Market breadth has remained at extremely low levels over the past year as a narrow set of stocks has accounted for the vast majority of market gains. The narrowness in markets to date has been a function of both top-down drivers – the AI thematic – and bottom-up fundamentals, represented by divergent revenue and earnings growth. Consensus is now anticipating this gap to close somewhat, with expectations of an acceleration in earnings growth for the broader market, and a significant deceleration for the Big Tech cohort (see chart, below). The mega-cap US tech companies have demonstrated very strong earnings growth in the last 18 months, driven by renewed cost discipline and sustained revenue growth. The benefits of that cost discipline are expected to wane in coming quarters though, bringing earnings growth down closer towards the rest of the market. In aggregate, these companies remain underpinned by great businesses and strong fundamentals, but they are vulnerable to downside asymmetry on revenue and earnings delivery relative to the rest of the market. There is also a case for a broadening of equity market returns regionally. European economies will be more sensitive to interest rate cuts than the US economy, and in Japan real wages have turned positive after many months of contraction. Europe and the UK for example both saw a return to positive GDP growth earlier this year following a period of weaker growth and a more protracted earnings slowdown. These regions should be further supported by interest rate cuts. European consumers in particular have higher exposure to variable interest rate mortgages (relative to the US) and companies are more dependent on bank lending. In contrast, the narrative in the US has shifted from bringing inflation under control to avoiding a recession. While a US recession isn’t our base case, there is the potential for catch-up in some regions.
1. Headline valuations continue to favour markets outside of the US
A soft landing for the US economy remains our central scenario and we expect equity markets to be well-supported in the medium term by modest growth in corporate earnings. In Europe, inflation has remained on a clear downward path as the eurozone and UK have emerged from shallow recessions.
2. Scope for market drivers to broaden, creating opportunities for active investors
We continue to see an underappreciated earnings improvement story underway that should continue to support Japanese equities. Three decades of deflation has led to corporations and individuals stock-piling their cash. We are now seeing ongoing reforms, led by the Tokyo Stock Exchange and various government institutions, aimed at improving governance and capital efficiency. These reforms are being introduced alongside incentives such as the NISA tax free investment scheme for individuals. Such initiatives should help to put excess cash to work and raise what are exceptionally low rates of equity ownership relative to other developed markets. As a result, we are seeing greater focus on shareholder returns as well as increased investment and capital spending. This renewed focus on productivity and profitability is further supported by a more normal inflationary backdrop that is leading to the Bank of Japan’s pivot away from yield curve control at a time when most central banks are biased towards easing. We believe that this should provide greater support for the currency, which has eroded the returns of foreign investors for most of the last decade. As a consequence, we should see an increased number of attractive opportunities in domestically focused businesses.
3. Japanese companies remain well positioned to return cash to shareholders
The political calendar has been particularly busy in 2024. More than 40 countries representing three quarters of the global investable universe have held, or are scheduled to hold, national elections. The US election in November remains one of the most closely anticipated, with an outcome that has the potential to significantly impact geopolitical relationships. In general, policies and policy differences of the Democrat and Republican candidates are still lacking in key areas, while greater clarity could perhaps serve to increase short-term volatility rather than reduce it. That said, where differences are apparent – trade tariffs, energy policy, deregulation of banks, drug pricing – we think the implications are clear. In either scenario, we expect to see trade policies that realign US relations away from rivals and prioritise advancing US leadership in high-tech industries. History has shown that positioning portfolios around who you think is going to win an election is almost always a losing strategy, and it is always important to have a diversification of risk. Of course, this is not to say that we ignore the potential policy risks, but we believe it is more important to remain focused on the outlook for the economy, the direction of interest rates, the forecast for earnings growth and the relative attractiveness of valuations. Within our portfolios we prefer to find companies that are in control of their own destiny. To this end we have tried as best we can to minimise our exposure to some of the sharp edges that are firmly in the crosshairs of policy risk.
4. US election: potential for increased volatility but fundamentals take precedence
“The August market correction saw a de-rating in equities to reflect a more uncertain outlook for the US economy, but they have quickly recovered losses, supported by good earnings growth and the outlook for easier monetary conditions”
“We continue to see an underappreciated earnings improvement story underway that should continue to support Japanese equities. Three decades of deflation has led to corporations and individuals stock-piling their cash”
S&P ex Tech
Tech ex Big 6
18
16
14
12
10
8
0
-2
4Q23
1Q24
2Q24E
3Q24E
4Q24E
EPS growth S&P 500 ex tech and Tech ex Big 6
70
60
50
40
30
20
Big Tech 6 EPS growth
Source: Standard & Poor’s, Refinitiv, FactSet, UBS, as at 19 August 2024
EPS growth beginning to accelerate for the rest of market… …as Big Tech EPS momentum is expected to decelerate
There are few cheap spots
Valuation vs 15-year median (% above or below)
Equity market
CAPE
Forward P/E
Trailing P/E
P/B
Dividend yield
25 (19%)
4.7 (60%)
1.4 (39%)
15 (10%)
11 (-7%)
12 (-13%)
1.9 (5%)
3.8 (1%)
19 (11%)
13 (-3%)
15 (-11%)
2.0 (15%)
3.2 (0%)
21 (-4%)
14 (-3%)
15 (-8%)
1.4 (7%)
2.4 (-12%)
12 (-10%)
12 (0%)
15 (12%)
1.7 (6%)
2.8 (-3%)
20 (19%)
32 (29%)
US
UK
Europe ex. UK
Japan
EM
-25% to -15%
-15% to -5%
-5% to 0%
0% to 5%
5% to 15%
15% to 25%
>25%
<-25%
Key:
Neutral
Cheap
Expensive
Source: LSEG Datastream, MSCI and Schroders Strategic Research Unit. Data to 31 May 2024. Figures are shown on a rounded basis. Assessment of cheap/expensive is relative to 15-year median.
11
9
7
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
FY2024
FY2023
FY2022
FY2021
FY2019
FY2018
FY2015
FY2020
FY2017
FY2016
FY2013
FY2011
FY2012
FY2014
Value of sharebuybacks announced in Apr-Jun up 1.7x YoY to ¥7.3t
Total value of announced share buybacks by fiscal year (¥t)
60%
50%
40%
30%
20%
10%
0%
Jan 00
Jan 02
Jan 04
Jan 06
Jan 08
Jan 10
Jan 12
Jan 14
Jan 16
Jan 18
Jan 20
Jan 22
North America
EU
Percentage of net cash companies (excluding financials) / 44% of Japanese companies remains net cash
Source: Mizuho Securities Equity Research, based on Nikkei and TSE, as of 27 June for FY2024. / Source: SMBC Nikko, MSCI, Schroders, as at 31 December 2023
Japanese companies remain well-positioned to return cash to shareholders
70%
$bn
23
25
35
52
55
13
27
38
45
CY18
CY19
CY20
CY21
CY22
CY23
CY24E
CY25E
Triple digit ($US bn) infrastructure spend vs. current single digit ($US bn) in revenue…
Capex forecasts across the Big 3 hyperscalers
AI: Can future revenue justify current capex quickly enough?
2020A
2021A
2022A
2023A
2024E
2025E
2026E
Roughly $10bn and $20bn of incremental AI/cloud uptake revenue in 25/26
Big 3 hyperscaler incremental consensus revenue $ growth
Source: Barclays Research, Bloomberg Consensus, Company Documents as of June 25, 2024
Source: Goldman Sachs, Company data as of July 15, 2024. Hyperscalers include AMZN, MSFT, GOOGL. Amazon capex is GSe specific to only AWS, Google and Meta capex is GSe of server and network equipment and Microsoft capex is on a consolidated basis.
EPS growth beginning to accelerate for the rest of market…
…as Big Tech EPS momentum is expected to decelerate
80%
Important information The Guinness Global Equity Income Fund is an equity fund. Investors should be willing and able to assume the risks of equity investing. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested. Further details on the risk factors are included in the Fund's documentation, available on our website (guinnessgi.com/literature). This Insight may provide information about Fund portfolios, including recent activity and performance and may contain facts relating to equity markets and our own interpretation. Any investment decision should take account of the subjectivity of the comments contained in the report. This Insight is provided for information only and all the information contained in it is believed to be reliable but may be inaccurate or incomplete; any opinions stated are honestly held at the time of writing but are not guaranteed. The contents of this Insight should not therefore be relied upon. It should not be taken as a recommendation to make an investment in the Funds or to buy or sell individual securities, nor does it constitute an offer for sale.
Learn more about Guinness Global Investors
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Industry group metrics: Quality and growth
Source: Bloomberg, Credit Suisse Holt as of 30th June 2024
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
5yr EPS CAGR
5yr Revenue CAGR
Operating Margins
Profit Margins
Return on Assets
Capital Goods
Commercial & Professional Services
Transportation
9.4%
13.9%
11.3%
8.4%
11.9%
8.6%
15.9%
24.0%
14.7%
5.3%
7.1%
-0.2%
4.2%
Taking this one step further, within the IT sector, it has been a handful of large-cap technology stocks that have skewed returns at the index level. If we take the S&P 500 return over the past two years and exclude performance from the "Magnificent 6" (Amazon, Apple, Google, Meta, Microsoft, Nvidia) we are left with the sector returns from the remaining 494 names. This is illustrated by the grey bars in the chart below. Excluding these six names, that Industrials have outperformed all other sectors, in other words making them the ‘best-of-the-rest".
Magnificent Six contribution to total return of S&P 500 and sectors
30th June 2022 - 30th June 2024
Source: Bloomberg, MSCI as of 30th June 2024
100%
Total return contribution (USD)
Information Technology
Communication Services
Industrials
Consumer Discretionary
Energy
Financials
Materials
Health Care
Consumer Staples
Utilities
Real Estate
S&P 500
Other
AAPL
META
GOOG
AMZN
NVDA
MSFT
MSCI World Sector Indices: 2 year performance
90%
Total return (USD)
IT
Comm. Services
Consumer Disc.
Consumer Stapl.
89.8%
56.2%
41.3%
38.8%
48.2%
33.6%
25.2%
19.3%
11.6%
8.9%
0.4%
43.9%
MSCI World
Industrials are noted for being a cyclical sector, impacted by broader macroeconomic cycles, but also affected by smaller cycles of extended and retracted demand, based on inventory levels, company investment, and monetary policy. At present, the consensus is for a wider Industrial slowdown in 2024 as higher interest rates affect capital investment decisions and the post-pandemic investment boom fades. However, when looking back over the past 30 years, this appears inherently normal.
Cyclicality
Backlog, a key indicator for the sector, refers to orders that are yet to be executed on but remain in the pipeline. They give visibility into the forward demand picture and can be used to forecast future revenues. Some firms receive orders months or even years in advance, due to the long-term planning going into future projects. While it is normal to operate with some backlog against which to execute, the industry is currently at elevated levels. This is due to strong demand for Industrial goods but is also exacerbated by bottlenecks (supply chain disruptions and tight labour markets) which have caused backlogs to build. These are forecast to ease going forward, as ‘just in case' inventories are liquidated and supply chains normalise, but there is nonetheless a clear trend of growing backlogs in the sector which gives us good insight into the growth outlook for many Industrial firms.
Backlog
The nine current Industrial holdings in the Fund all exhibit high returns on capital, healthy margin profiles, strong balance sheets, dividends supported by growing free cash flows as well as an encouraging growth outlook. The combination of these factors helps to explain their good performance over the past five years and more. While there are no revenue growth figures for the Index, an average of 23% revenue growth since 2019 across the nine holdings and 57% average earnings per share growth (vs 22% for the index) shows the strong tailwinds supporting the Fund's Industrial names.
The Fund's Industrial holdings
Over the past two years, Industrials have performed particularly well. From June 2022 to June 2024, the MSCI World Industrials Index has returned +48.2%, outpacing the MSCI world (+43.9%) in USD. This performance has been particularly impressive when looking at attribution by sector. As discussed in many prior commentaries, Information Technology has played a dominant role in driving index returns over the past ~2 years, which has led the index higher. The chart below illustrates the dominant performance of the Industrials sector, outperforming all other sectors other than Communication Services & IT.
How has the sector performed?
The Guinness Global Equity Income Fund currently holds nine high-quality US and European Industrial names. These account for c.24.3% of the portfolio (vs 10.7% for the MSCI World Index), making Industrials the Fund's second largest sector overweight. Here we discuss the sector's performance and quality characteristics, and three key trends shaping its outlook. This overweight is a function of our bottom-up process (where we seek to identify high-quality companies, with consistently high returns on capital, strong balance sheets and a growing dividend). However, we also view the Industrials sector favourably given its range of attractive characteristics and emerging secular growth drivers. In this update, we will explore the sector in more detail, outline the characteristics of our current holdings, and look ahead to the tailwinds that are driving the sector. The Fund's nine industrial names span many different use cases, from power management to grid infrastructure, industrial compressors to robotics and even EV powertrains, aerospace components, and dishwashers. The range is broad and the end markets varied. Given this wide exposure, the Industrials sector is often perceived as a barometer for the health of the broader economy.
Industrials: the best of the rest
Whilst the temptation is to focus on Industrials as a whole, the sector is in fact very varied. The Global Industry Classification Standard (GICS) breaks it down into three industry groups: • Capital Goods • Commercial & Professional Services • Transportation With different remits and different end markets, each industry group displays different growth and quality characteristics. All Fund industrial revenues are derived from either Capital Goods or Commercial & Professional Services, with more weighting to the former. No revenues come from Transportation. Within these industry groups, it is also noteworthy that Electrical Equipment (including electrical components, cables, grid infrastructure etc), Machinery (heavy-duty tools, construction equipment, compressors, elevators) and Commercial Services (payroll & HR software, ancillary service revenues) are the industries with the largest overweight allocations. Again, it is worth stressing that this is a result of our bottom-up stock selection process. However, when delving into the sub-group characteristics, it is evident that some areas provide more attractive investment opportunities due to superior quality and growth characteristics.
Industry groups
As noted above, each industry group can vary substantially:
When looking at Cash Flow Return on Investment (CFROI), a return metric that measures the cash generated by a company's operations relative to its investment base, the difference in quality between the industry groups becomes more apparent. As expected, Services generates a superior CFROI, but even though Capital Goods and Transportation both have fairly capital-intensive business models, the former has a clearly superior CFROI profile over the period over the past 10 years. It is therefore perhaps unsurprising that given the superior quality and growth metrics (particularly the 5-year earnings growth rate), Capital Goods and Commercial & Professional Services have outperformed Transportation in performance terms (by over 50% since 2019). It is also noteworthy that Capital Goods (the Fund's largest overweight) was the best performer over this period and demonstrated lower volatility.
• • •
Margins: The generally leaner and more asset-light Commercial & Professional Services segment has a superior margin profile to both Capital Goods and Transportation. Returns: this is also the case when looking at returns. Commercial & Professional Services show superior return on assets as the focus on providing services with minimal need for capital-intensive spending generally leads to more favourable return metrics. Growth: All three industries have been growing revenues at c.5% over the past five years, but, encouragingly, the two industry groups where the Fund has exposure have seen far better earnings growth. Conversely, Transportation has seen earnings fall over a five-year period, which may be due to inherent industry volatility with notable recent examples of the pandemic and conflict-affected supply chains both causing substantial disruptions.
Transportation appears to show the most cyclicality, particularly over the past decade, where global exogenous shocks have caused pronounced supply chain disruptions for airlines, shipping, and logistics firms. Capital Goods: During economic expansions, businesses invest heavily in new equipment and infrastructure, but non-essential capex is often the first to be cut (or delayed) during downturns. However, enduring growth drivers (see section below) seem to have dampened volatility over the past decade. Services is the least cyclical group as many firms have a high proportion of recurring revenues and often have more sticky customers. Some of the Fund's Industrial holdings generate a significant portion of revenues from essential service contracts (incl. machine maintenance and repair) which are therefore less susceptible to macro conditions given their fixed nature.
Industry groups explored: CapGoods in, transport out
“The generally leaner and more asset-light commercial & professional services segment has a superior margin profile to both capital goods and transportation....”
“Industrials are noted for being a cyclical sector, impacted by broader macroeconomic cycles, but also affected by smaller cycles of extended and retracted demand...”
2019 - 2023 cumulative growth drivers: Price vs volume
Source: Guinness Global Investors, Bloomberg, 29th February 2024
Price
Volume
Consumer Staples organic price drivers
1%
4%
2%
3%
6%
8%
11%
12%
7%
-2%
-1%
5%
Price Change
Volume Change
Organic Growth
Source: Guinness Global Investors, Bloomberg, 29th February 2024. Price & Volume data is for a basket of Staples businesses
Consumer Staples category exposures
Snacks: 17%
Beverages: 15%
Nutrition: 11%
Home: 10%
Alcohol: 10%
Personal: 9%
Dairy: 8%
Healthcare: 4%
Adhesives: 5%
Hygiene: 4%
Coffee: 3%
Water: 2%
Pet: 2%
Branding is a key differentiator for Consumer Staples, perhaps more than in other sectors due to the core industry dynamics. Products are often purchased regularly, and purchasing decisions take place with limited planning or thought, due to their generally low cost. Staying front of mind is therefore paramount. This is achieved via consistent advertising campaigns which highlight the value proposition as well as the latest product innovations, helping to reinforce strong brand messaging and personal attachment. Such is its importance, Advertising & Promotional spend (A&P) is seen as an essential cost of doing business as without it, sales would likely tail off quickly. The Fund's Consumer Staples holdings have, we believe, a superior brand portfolio which continues to grow sales organically, and this is partly explained by their sizeable A&P investments. Not all businesses disclose their A&P spend, but for those that do the total figures are substantial.
Brands
However, while investing bottom-up, we have a favourable view of the sector due to its attractive characteristics. In this report, we will explore the underlying drivers of the sector, outline the current market conditions, and look into the Fund's Consumer Staples holdings. We also explain why we believe that the current environment may present a favourable opportunity for these businesses.
The Consumer Staples sector is often referred to in the absolute but is more diverse than one might think. There are 12 varied sub-industry groups, from Brewers to Agricultural Products and Tobacco, as well as the better-known parts of the market such as Household Products and Food Retail. At time of writing, the Funds have a c.25% weighting to Consumer Staples. Among the 10 Staples names in aggregate, the largest single allocation on a revenue basis is to Snacks (17%), followed by Beverages (15%) and Nutrition (11%). The remaining 57% allocation is split across 10 further categories, which leaves the Staples exposure relatively well diversified.
There are three key drivers of organic growth for Consumer Staples companies: Pricing, Volumes, and Mix. Pricing Pricing strategy and pricing power is a key component of the organic growth picture and especially in the period since the end of 2021, when price increases have driven the majority of sector growth, since volumes for many sub-categories have faced substantial headwinds. It comes as no surprise that this has coincided with the large increase in global inflation rates. Many Staples businesses (owing to strong branding and customer loyalty, qualities discussed below) have managed to pass through price increases in excess of inflation rates and have therefore seen healthy organic growth figures. As inflation heads towards more normalised levels in many major economies, the ability to sustain these levels of price increases has diminished substantially, but we are still seeing mid to high single-digit price increases being passed through to the end consumer. The chart below shows how price increases have accelerated over the last five years before moderating over the past four or five quarters.
Industry mix: It's not just snacks
The Guinness Global Equity Income Fund currently holds 10 high-quality US and European Consumer Staples stocks. They account for around 25% of the portfolio and make the sector the largest overweight compared to the benchmark. In this report we discuss the Consumer Staples sector's current dynamics, key performance factors, and outlook. It is worth stressing that this overweight position is a function of our bottom-up process (where we seek to identify good quality companies, with consistently high returns on capital, strong balance sheets and a growing dividend). As a reminder, our bottom-up approach has four key tenets:
• • • •
Quality: We focus on companies with a long history of persistent high return on capital and avoid highly leveraged companies. Value: We try to identify companies that are cheap vs market, peers, and their own history. Dividend: We target a moderate dividend yield (we do not screen for high dividend yield companies) and aim to grow the dividend stream year-on-year. Conviction: The Fund typically has 35 approximately equally weighted positions. We target a low turnover with average investment horizon of 3-5 years.
The Fundamentals
Volumes In contrast to price increases, which have been strong across the board, volume trends been more varied. At the industry level, the chart above shows that volume growth peaked in mid-2021 and has declined since. This reflects the increased price sensitivity – and in some cases the financial stress – of the consumer, although the US market and parts of Europe are still holding up relatively well. Still, despite the more recent net volume declines, organic growth has remained strong. This is particularly noteworthy in that the ‘down-trading' (switching from branded to cheaper alternatives) that many investors feared has been far less widespread than expected, as demonstrated by management commentary from a range of the Fund's holdings.
Mix Often overlooked, the product mix is also an important part of overall growth. This refers to the different product forms offered by a company, including the type of product sold, the quantity it is sold in (single buy / multibuy) and the size of the packet itself. Faced with rising costs and an increasingly price-sensitive consumer, Staples businesses have been reducing the size of certain product ranges. Even alongside flat pricing, this has the effect of increasing the average cost per quantity sold and contributes to organic growth.
Mondelez CEO Dirk Van de Put (on pricing dynamics in the European market): “there is very little or low down-trading … because everybody will have to (raise) prices. So, it's a joint movement between all the brands… we don't expect that there will be huge shifting of consumers.” Coca-Cola CEO & Chairman James Quincey: “if you've got to save money, you don't trade down averagely across everything … our objective is to make sure [consumers] value our brands so that they make the choices in the shopping occasion… we preserve our brand strengths because we deliver value for them in the product, in the marketing and innovation.” P&G CFO Andre Schulten: “the U.S. continues to be very solid and continues to impress. Consumers that are choosing P&G products continue to trade up within our portfolio… This speaks to the health of our proposition, but also the health of the consumer and their willingness to invest. Some consumers will look for value in private label, but an equal if not higher amount find better value in our propositions as we drive continued superiority via innovation.”
There is wide variation by category. Some (Pet, Beverage, and Healthcare) have had tailwinds and managed to grow both volumes and price. Others (notably Water, Dairy, and Alcohol) have seen greater challenges, particularly on the volumes side, as shown by the chart below.
At the category level
There is wide variation by category. Some (Pet, Beverage, and Healthcare) have had tailwinds and managed to grow both volumes and price. Others (notably Water, Dairy, and Alcohol) have seen greater challenges, particularly on the volumes side. Pricing growth has been strong for the Fund's Consumer Staples holdings, both on a one-year basis and since COVID (Q1 2020). On a four-year basis, across all holdings, the average price increase has been 24.7%. Even though volumes have lagged behind pricing, net volume growth still stands at 3.3% over the same time period, with all but three companies seeing positive growth.
And at the Fund level
“The three key drivers of organic growth for Consumer Staples companies focus on pricing,volumes, and mix...”
Important information For Professional Clients only and not to be distributed to or relied upon by retail clients. Responsible investing is qualitative and subjective by nature and may not reflect the beliefs or values of any one particular investor. Past performance is not a guide to future performance. Opinions and examples represent our understanding of markets: they are not investment recommendations advice. All data is sourced to Aegon Asset Management UK plc unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice. Data attributed to a third party is proprietary to that third party and is used by Aegon Asset Management under licence. Aegon Asset Management UK plc is authorised and regulated by the Financial Conduct Authority. Adtrax 6523588.6; Expiry 30 June 2025
Glossary of Investment Styles
“Cheap” stocks with attractive valuations, often “out of favour” or “contrarian”. Inputs: Price/Earnings, Price/Book, Dividend Yield... Stocks with strong recent performance, with a positive trend or “in favour”. Inputs: Deep Learning Momentum, Price Momentum, Relative Strength... Stocks of companies whose earning have been positively revised by sell-side analysts. Inputs: Earnings Call Transcripts, Earnings Revisions, Earnings Surprise... Stocks with positive growth, especially history of delivered, i.e. stable growth. Inputs: Earnings Growth, Dividend Growth, etc. Financially strong stocks with high profitability, high balance sheet quality etc. Stocks with high return volatility or beta. Stocks with lower market capitalization.
Value Momentum Revisions Growth Quality High Risk Small Cap
Y: Year; YTD: Year-To-Date; SI: Since Inception
YTD
1Y
3Y
5Y
10Y
SI
2.8
2.7
2.6
0.3
0.4
1.1
Benchmark: MSCI World, Inception: 01/01/1999
Past performance does not predict future returns. Source: IDS as of 30/11/2023, in EUR, gross offees. AllianzGI Best Styles Global Developed Composite performance inception date: January 1,1999. Benchmark: MSCI World.The performance shown above is gross and does not reflect the deduction of investment advisory fees.
AllianzGI Best Styles Global Developed Equity Composite – active returns (in %)
This is a marketing communication. For fund distributors and professional investors only.
Milestones and major steps
Thanks to the strong academic credentials of the team, they were able to embark on testing and applying a broad range of quantitative techniques, some of which today fall under the banner of AI. As such, the team has been active in applying AI techniques for over 10 years and, today, AI forms an integral part of the investment process. This includes areas such as machine learning, neutral networks, and natural language processing, which has now merged into large language models such as ChatGPT. In 2021, a framework on how to integrate AI signals in the Allianz Best Styles strategy was developed. Separately, a range of dedicated funds powered by this AI research was launched. While AI is a very exciting field, other areas of research have not been neglected. The factor which has probably undergone most research and most change is “Quality” (while there is only some consensus in terms what this should comprise, there is generally a focus on profitability and other accounting measures).
This is partly due to the extent of the academic research conducted over the years, but also the proprietary efforts by the team. And this effort is ongoing, with enhancements made in 2023 and more on the way. Today Allianz Best Styles is a truly balanced and diversified multi-factor approach. The investment style “Value” still plays a significant role, but it has evolved and is even more complemented by “Quality” and a broader definition of trend-following styles than before. In combination with AI techniques, this makes for a compelling proposition and shows how research can help to retain an edge in the highly competitive asset management industry.
Embarking on the artificial intelligence journey
The team is well-positioned to take advantage of technological developments and the renewed tailwinds for systematic equity investing, building on their extensive track record and staying true to the investment philosophy and approach. It is an exciting time for systematic equity investing and the team is ready to make the most of it.
Source 1. Tracking error is a measure of volatility of excess returns over a benchmark. Information Ratio is a risk-adjusted measure of excess returns
25 successful years and counting
Academic research has been the foundation of factor investing. The understanding that there is more to returns of investment portfolios than skill, and the understanding that there is structure to equity market returns, has improved the ability of investors and asset owners alike to make good investment decisions. However, academic research on financial markets alone does not always translate directly into implementable investment strategies. Research by practitioners is equally important and here the AllianzGI Systematic Equity team had a head-start with its early beginnings. Since the origins of the Best Styles strategy in 1999, the AllianzGI Systematic Equity team has remained at the forefront of quantitative strategies, conducting their own research and enhancing their investment process. While the broad framework of styles and portfolio construction has remained consistent, the team found early on that there was room for improvements.
25 years of investment strategy development by the Systematic Equity team
25 years ago, when the Best Styles franchise was launched in 1999, there was no established terminology in the financial industry for this approach. Instead, it was coined “Best Styles” – something that would today be called a “multifactor” strategy. Today, the Systematic Equity team at Allianz Global Investors (AllianzGI), can proudly look back at one of the longest global equity track records of any systematic investor. And, remarkably, the broad framework of the strategy has remained consistent over the years, making this history even more relevant for investors today. This also shows the resilience and conviction of the team, which has experienced much success over 25 years but has also overcome many challenges, not least the so-called “factor winter” period of 2018-2020, a period when most factors underperformed. At present, the Allianz Best Styles Global Equity strategy is the team’s flagship strategy with not only the longest track record but also the largest assets; variations of this strategy make up more than half of the assets that the Systematic Equity team currently manages on behalf of clients.
Over time, the strategy has delivered on its promises, delivering strong risk-adjusted returns, achieving a high information ratio of 0.6 due to the low tracking error of 1.7% . The strategy invests in a well-diversified mix of the five long-term investment styles, enhanced by Artificial Intelligence, it aims to achieve high alpha potential and harvest risk premia.
“The AllianzGI Systematic Equity team has been active in applying AI techniques for over 10 years and, today, AI forms an integral part of the investment process”
Disclaimer Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. This is a marketing communication issued by Allianz Global Investors UK Limited, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited, company number 11516839, is authorised and regulated by the Financial Conduct Authority. Details about the extent of our regulation are available from us on request and on the Financial Conduct Authority's website (www.fca.org.uk). For a free copy of the sales prospectus, incorporation documents, daily fund prices, Key Investor Information Document, latest annual and semi-annual financial reports, contact the issuer at the address indicated below or regulatory.allianzgi.com. Please read these documents, which are solely binding, carefully before investing. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investor
To learn more about multifactor investing and Allianz Best Styles visit our website
In a recent interview, Malie Conway, Head of Global Clients and Growth Markets at Allianz Global Investors (AllianzGI), sat down with Dr. Michael Heldmann, CIO of Systematic Equity, to discuss the intricacies and advantages of factor investing. Dr. Heldmann, who leads the team behind AllianzGI’s Best Style franchise, provided valuable insights into why investors should consider the strategy and how it can be effectively implemented in various portfolios. He highlighted individual factors can be effective at different stages of the business cycle. For instance, value investing, which often involves contrarian views, tends to perform well early in the cycle when economic indicators like Purchasing Managers’ Index (PMI) and Gross Domestic Product (GDP) are on the rise. Conversely, trend-following strategies are benefitting more during stable periods, while high-quality investments shine later in the cycle. Dr. Heldmann emphasised the importance of diversification, noting that it is difficult to precisely time factor allocations. Instead, he advocates for building a portfolio that is well-positioned for any phase of the business cycle. This approach involves investing in multiple factors simultaneously to ensure stability and consistent excess returns. Based on the experience with and evolution of the strategy over 25 years, while past performance is not indicative of future results, Dr. Heldmann expressed confidence in the strategy’s ability to continue delivering strong returns, given its robust framework and adaptability. Finally, Dr. Heldmann highlighted the role of technology and AI in their investment process. With a vast universe of 30,000 stocks to analyse, technology is essential. The transition from simple statistics to advanced AI has been smooth, allowing them to improve their analysis and incorporate vast amounts of textual information into their decision-making process. This technological advancement has been crucial in maintaining their competitive edge and delivering strong returns for their investors. Watch the full interview below.
Find out more about the funds that Natasha manages; the Artemis Global Select Fund and Artemis Funds (Lux) Global Focus
Important information FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. This is a marketing communication. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness Any statements are based on Artemis’ current opinions and are subject to change without notice. They are not intended to provide investment advice and should not be construed as a recommendation. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
At the top of a bull market, as investors try to justify paying bubble prices for stocks, phrases like ‘this time it’s different’ abound. At the nadir of a bear market, as they shun the bargains strewing their path, people are more likely to be heard muttering ‘permanently uninvestable’. For the past few years, that sort of perma-gloom has surrounded Chinese equities. China’s economy has been in a slump since the pandemic. The country’s locked-down and laid-off workers did not enjoy state-subsidised pay cheques and those lucky enough to have jobs want to spend rather than save. The government has been clumsy at best in its handling of tricky challenges in recent years, pouring ice-cold water on the overheated housing market and clamping down aggressively on entrepreneurs considered overpowerful. Looking ahead, there is the deadening weight of a potential second Donald Trump presidency and his threat of 60% tariffs on Chinese imports . Investing in China through all this has required courage and a belief that the slowdown is temporary – cyclical rather than structural. Recent announcements from the Chinese government of policy measures to stimulate the economy now support that belief. But is this enough to turn the tide? Is China really becoming investable again?
We saw the start of more supportive China policy at the beginning of the year but then hit an air pocket when policy support stopped. This latest series of measures, unveiled early last week, is a sign that policy momentum may once again accelerate. First, we saw interest rates reduced on multiple bank instruments (mortgages, short-term central bank deposits and banking reserves) . One of the biggest surprises – and what helped power the stock market higher – was the swap facilities put in place to allow financial institutions to buy equities, and companies to buy back their own stock . If companies really do use the Rmb300bn (£32bn) relending facility, we could see another 2.5% of share buybacks in the A-share market, on top of the 1.2% we have seen so far this year . A total 3.7% of share capital bought back is not a bad start in supporting equity market prices. These measures by the People’s Bank of China (PBOC) – the Chinese central bank – are innovative and reminiscent of the US Federal Reserve in recent years starting to flex its balance sheet power to target certain areas of the economy. They mark an additional shift in policy direction, which is more focused on correcting asset price deflation. In May, the PBOC started to target house price deflation with a funding facility for local governments to buy up excess housing inventory. I believe this intervention in the stock market is similar.
The question is whether this will be a flash in the pan. We have had multiple false starts. There are concerns, for instance, that the government is relying on non-wholly-owned government and private institutions to deploy capital in the stock market rather than deploying it directly itself. Whether these non-bank financial institutions will want to use the swap facilities remains a question. I am still unsure why insurers, mutual funds, brokers and the like would want to allocate more to equity. They seem to have little current appetite. For me, these measures are putting the kindling in the fire for an equity market rally. The liquidity is in place to be tapped.
Nevertheless, if we take a longer-term view and see the stimulus as a sign that the message of economic malaise has got through to the very top – to Xi – we can be more confident of further support to come. If this is targeted towards fiscal stimulus, then China could see a significant rally both on the fundamentals and on the premium the market is willing to pay. The question for investors is how to navigate this shifting landscape to their advantage. We have had a couple of small positions in China for a while. In both cases we felt that, regardless of the macroeconomic noise, the companies looked well placed to deliver earnings growth and strong free cashflow. We have added to these positions and are examining others, particularly consumer stocks. If there is policy follow-through, it is likely to be targeted at sparking consumer demand rather than the historical favourites of infrastructure and property development. Of course, a Chinese recovery also creates indirect opportunities for other companies, particularly in the luxury space, which has seen large drawdowns as the Chinese economy has stumbled. There are many European fashion houses that will be cheered by a recovery. In China, you have to invest with the policy momentum. There are hurdles ahead but the picture looks more optimistic than it has in a long time – and it is not just Chinese companies that are set to benefit.
What investors have been really calling out for is fiscal stimulus. China cannot reinvigorate its economy by building more electric vehicles and solar panels. It needs to balance supply with demand. Chinese households are sitting on large and growing savings but they do not have the confidence to spend yet. Last week we saw the first signs of urgency to tackle this problem with force. President Xi Jinping convened an out-of-schedule politburo economic meeting where there was a change in tone with the focus on stalling the drop in house prices, boosting consumption and promoting the private sector. On their own, the measures seem unlikely to be enough to support a continued China market rally, and we may see the rally fade going into the US election if Trump still has a strong chance of returning to the Oval Office.
Momentum and buybacks
Sense of urgency
Sources 1. fortune.com 2. reuters.com 3. ft.com 4. ft.com 5. bloomberg.com
“For me, these measures are putting the kindling in the fire for an equity market rally. The liquidity is in place to be tapped”
“Chinese households are sitting on large and growing savings but they do not have the confidence to spend yet”
Natasha Ebtehadj, fund manager, global equities
Global equities fund manager Natasha Ebtehadj delves into the detail of September’s policy announcements from Beijing to see whether they are really enough to kick-start a prolonged recovery in the Chinese stock market
Find out more
Webinar: Post-election breakfast briefing
As the dust settles from the race for the White House, grab your coffee and join Artemis’ US equity fund managers Cormac Weldon and Adrian Brass for a post-election de-brief. Tuesday 12 November, 09.30 Register here
Sources 1, 2, 3. Harris vs Trump: Forecasting Their Policies’ Effects on the US Economy 4. Goldman Sachs 5. Inflation Reduction Act of 2022
With days to go, the US election remains too close to call. While Kamala Harris has a slight lead in the polls, Donald Trump is generally better rated on the economy. Escalating tensions in the Middle East and political fall out from storms Helene and Milton also increase the potential for an ‘October surprise’ which could derail either candidate’s campaign. While we do not think the outcome of the election will fundamentally change the course of the US economy, there are clear differences between the two candidates’ approaches. We broadly put these into the categories of taxes, tariffs and regulation.
One of Donald Trump’s biggest pledges is to cut taxes. Trump plans to extend the law passed in his first term that lowered business and individual tax rates and which is due to expire in 2025. Trump also wants to lower the corporate tax rate further, from 21% to 15% . Other potential policies include eliminating federal income taxes on worker tips, overtime pay and Social Security benefits.
Lower taxes
In part to fund these tax reductions, Trump has proposed more trade tariffs. Tariffs of $50bn on China were introduced by Trump in 2018, imposed to promote domestic manufacturing and to combat China’s theft of intellectual property. The tariffs were upheld (and in some cases increased) by Biden’s administration. In this election campaign, Trump is suggesting 20% tariffs on all imports, rising to 60% on goods from China . The tariffs could be more wide ranging: during the campaign Trump has threatened giant new tariffs on cars from Mexico and on farm machinery made by John Deere & Co. if the company moves production abroad.
Tariffs…making America great again?
In a further attempt to boost growth, Trump would continue his agenda, begun in the first term, of deregulation. As in his previous presidency, an area of focus is likely to be environmental and energy regulations. This is likely to include reversing some Biden area restrictions on greenhouse gas emissions and removing investment in electric vehicles. Elsewhere, to facilitate investment and promote the pro-growth agenda, a Trump administration would likely make efforts to reduce some areas of financial service regulation.
Cutting red tape
A Trump win…
In contrast, Kamala Harris is proposing raising taxes on corporates and the wealthy as a way of boosting revenues. She proposes increasing the corporate tax rate to 28% and lifting the tax on capital gains to 28% for people earning $1 million or more . This tax increase on corporates would in part be used for tax relief for lower- and middle-income groups. Some of Harris’s proposals include the expansion of child tax credits and the introduction of tax credits for first time buyers. Some analysts estimate that the corporate tax increase would cause a 5% reduction in earnings for the S&P500 .
Raising taxes
As noted above, the Biden administration kept many of the tariffs previously imposed by Trump. Harris is likely to maintain the status quo with no surprises.
Tariffs
Having been instrumental in introducing the 2022 Inflation Reduction Act which (among other things) funded energy and climate projects aimed at reducing carbon emissions by 40% by 2030 , Harris is unlikely to change her stance on energy and environmental regulation. In addition, Harris would likely continue Biden’s increased scrutiny and regulation of many areas of financial services. This has included more transparency on banking fees, increase in regulatory capital banks must hold and actions taken against cryptocurrency firms.
Regulation
First we would note that, in order to introduce any major policy reform, either candidate would need a ‘sweep’ of Congress as well as a presidential win. Without this, any policy changes would be substantially watered down. The potential wildcard is Trump using executive orders to bypass Congress, as he did in his first presidency. This could enable him to push through some areas of policy, such as the imposition of tariffs. Where we have exposure to macro themes, our view is that they are structural and not in the firing line of either a Trump or Harris presidency. Infrastructure investment across both public and private sectors is huge. The state of roads, bridges, and water infrastructure in the US is poor after years of underinvestment. Although Trump has threatened to scale back some areas of the Inflation Reduction Act that has funded the investment, the reality is that support for infrastructure improvement is bipartisan and benefits many Republican states.
Data centre infrastructure is another area that is experiencing significant investment as a result of the rise in cloud computing and investment in AI. Data centres, as one might expect, require a number of components that are highly complex and require specialist labour to build and service. We are exposed on the hardware side, the labour side, as well as the power side through holdings in independent power producers. On a final note, we invest in the US because it is the home of strong domestic companies investing and pursuing growth. This is largely untouched by politics.
How are we positioned for either outcome?
A Harris win…
“We invest in the US because it is the home of strong domestic companies investing and pursuing growth. This is largely untouched by politics”
“Where we have exposure to macro themes, our view is that they are structural and not in the firing line of either a Trump or Harris presidency”
Cormac Weldon, head of US equities
Cormac Weldon, Artemis’ head of US equities, and manager of the Artemis US Select Fund outlines the policy differences between the two presidential candidates. He prefers to look beyond the election and invest in longer-term themes.
Important information The Guinness Global Equity Income Fund is an equity fund. Investors should be willing and able to assume the risks of equity investing. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested. Further details on the risk factors are included in the Fund’s documentation, available on our website (guinnessgi.com/literature). This Insight may provide information about Fund portfolios, including recent activity and performance and may contain facts relating to equity markets and our own interpretation. Any investment decision should take account of the subjectivity of the comments contained in the report. This Insight is provided for information only and all the information contained in it is believed to be reliable but may be inaccurate or incomplete; any opinions stated are honestly held at the time of writing but are not guaranteed. The contents of this Insight should not therefore be relied upon. It should not be taken as a recommendation to make an investment in the Funds or to buy or sell individual securities, nor does it constitute an offer for sale.
Expected change (%) in EU Interest rate in 2024
Change in interest rate (%)
-1.6
-0.9
-0.6
-0.5
-0.4
-0.3
-0.2
-1
-0.7
Occured
Expected
Dec - 23
Jan - 24
Feb - 24
Mar - 24
Apr - 24
May - 24
Jun - 24
Jul - 24
Aug - 24
Sep - 24
-1.5
-1.0
Expected change (%) in US Interest rate in 2024
Source: Bloomberg, as of 30th September 2024
US NonFarm Payrolls
Source: Bloomberg, US Bureau of Labor Statistics as of 30th September 2024 (August 2024 net revision over one month rather than two due to data not being available yet)
Thousands
Net revision to NFP
Chg. in NonFarm Payrolls (mom, 000s)
Consumer Price Index (yoy)%
Source: Bloomberg, US Bureau of Labor Statistics as of 30th September 2024
%
Personal Consumption Expenditure (yoy)%
Headline CPI
Core CPI
2.2
3.2
2.5
US Credit Card Debt vs Deliquency Rates
Source: Guinness Global Investors, Federal Reserve Bank of New York Consumer Credit Panel/Equifax and U.S. Bureau of Economic Analysis, as of 30th September 2024
Debt (Trillions)
Delinquency rates (%)
Credit Card Debt
Credit Card Delinquency Rates
Source: Guinness Global Investors, National Bureau of Economic Analysis, as of 30th September 2024
Retail sales
Retail sales (yoy %)
Avg. 2023
Avg. YTD
3.6%
2.3%
Components of Real GDP growth (QoQ, %)
1.7%
0.5%
1.3%
0.9%
0.6%
-0.5%
-0.6%
-0.9%
1.1%
0.3%
1.9%
0.1%
-0.1%
2.5%
1.4%
3.3%
1.5%
0.7%
0.8%
-2.2%
-0.4%
1.0%
-0.3%
-0.7%
-2.0%
Expenditures
Inventories
Fixed investment
Government Expenditures
Net Exports
Markets then began to price in significant monetary policy easing (with four cuts) by the end of the year. Furthermore, investors seemed encouraged by the dovish tone set by comments from Powell at the annual Jackson Hole Symposium. Powell provided arguably the strongest signal yet that the Fed is prepared to make an imminent cut to interest rates, which have remained at 5.25-5.5% for over a year. He stated “the time has come” for policy easing and indicated the softening labour market data could prompt the rate-setting committee to cut rates more quickly. This culminated in a long-awaited 0.5 point cut by the Fed during September, spurring a rally in equity markets towards the end of the month.
While the rate cutting cycle was initiated only within the last month in the US, the European Central Bank (ECB) began cutting rates at its June meeting. Interestingly, policy between the Fed and ECB has often moved in parallel due to the potential impact of interest rate divergence in harming the respective economies. However, European economies have seen very different levels of economic growth and inflationary dynamics, which were arguably weaker than in the US, encouraging European policymakers to act faster.
As the largest component of overall GDP, consumer spending is a key driver of economic growth, but in the face of tougher macroeconomic environment and rising inflation, pockets of weakness have emerged through the year. Over the quarter, retail sales growth held up well, with a significant jump in July to 2.9% from 2% in June. This was coupled with an uptick in consumer confidence, measured by the CBI Index, which grew in both July and August. However, retail sales growth looks slightly weaker over this year when compared to last year, which arguably presented a tough environment for consumers at the peak of inflation with rising interest rates. This contributes to concerns that the ‘consumer-led’ economy may be gently running out of steam, borne out of the rising levels of credit card debt and related delinquency rates in the US, which appear akin to levels leading up to the 2008 Financial Crisis. However, it is worth noting that although credit card and general household debt levels are rising, the household debt-to-income ratio has declined and remains historically low, at around 0.75 in recent quarters compared to over 1.0 during the Financial Crisis, indicating that consumers are on the whole borrowing within their income limit. The mixed picture seems to be echoed in commentary from company management. Mastercard’s CEO cited ‘healthy’ and ‘consistent’ levels of consumer spending whilst Intuit’s CEO highlighted a different picture of lower spending. However, the outlook seems promising as consumer spending is expected to rise following the recent interest rate cut from the Fed.
Expectations for interest rate cuts have shifted significantly this year following mixed signals from economic data and the tone set by the Fed in its committee meetings through the year. In Q1, markets were pricing in more than six cuts of 0.25 percentage points each, but ‘hotter than expected’ inflation coupled with stronger US economic data contributed to a more hawkish tone from the Fed. By April, expectations had quickly fallen to just one cut and many believed another rate increase was possible. Moving into Q3, stronger GDP data and improving disinflation was seemingly enough to hasten expectations of a cut. A particularly weak US non-farm payrolls report in August sparked fears that the Fed may have left it too late to begin the rate cutting cycle. The data came in with a downward revision of 112,000 jobs, one of the highest downward revisions since the start of the year.
The path of interest rates
As the US economy navigates the post-pandemic landscape with high interest rates and heightened geopolitical tensions, debate over whether the economy will experience a soft landing or a hard landing (or recessionary scenario) has been front of mind for many investors. Although there have been mixed signals, economic growth has pointed towards strength. Over the last quarter, revised US GDP data for 2Q24 increased at an annual rate of 3%, an acceleration from 1.6% in Q1. Given the current higher interest rate environment, markets had anticipated slower economic growth, but positively, the recent print was largely driven by consumer spending offering a 1.9% positive contribution, an indicator of economic strength. Furthermore, inventories jumped into positive territory, contributing 1.1% to real GDP growth, following two quarters of decline, pointing towards expectations of stronger demand.
Economic growth
Markets began 2024 with a positive view on the state of the US economy and the trajectory of interest rates. Economic data at the start of the year pointed almost universally to strength, feeding into expectations of several interest rate cuts and almost certainly no sight of an interest rate increase. However, signs of weakness emerged over Q2 as US GDP, manufacturing activity and consumer sentiment data all came in below consensus forecasts. This was echoed by comments from company management citing signs of a weaker consumer, feeling the pinch of rising inflation. Whilst we remain cautious of projecting the impact of elections on equity markets, there are certain policy areas that are more likely to change.
Consumer spending
Consumer Price Index (CPI) readings through the quarter have been encouraging as we leave behind the biggest increases in prices, by more than 9% in 2023, which were a contributing factor to the high-interest rate environment. Headline CPI inflation has come in under 3% over the past two months, a significant improvement as inflation had been 3% or higher for more than a year. The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) index, reached 2.2% inflation, its lowest reading since March 2021, and increasingly close to the Fed’s target of 2%.
Inflation on the way to target
“Expectations for interest rate cuts have shifted significantly this year following mixed signals from economic data and the tone set by the Fed in its committee meetings through the year”
The Federal Reserve (Fed) has started the policy easing cycle with a 50bps (basis points) rate cut and has indicated that more cuts may follow. Concerns over a recession have led the market to discount another 150bps cuts this year. This situation resembles the start of the year when the market anticipated six rate cuts. At the same time, inflation has declined to 2.5%, and it is likely that the headline CPI rate in the US will reach the central bank's target of 2% by 2025. In a world where inflation is headed lower, how should investors position their portfolios in terms of equity sectors and styles?
Before going into the analysis on how different inflation environments impact the performance of equity sectors and styles, table 1 provides a summary of different equity styles.
Here we show the beta to illustrate the sensitivity of the investment strategy towards the performance of the overall market. For instance, the more defensive equity styles including value and high dividend yield, or sectors such as utilities and health care (see tables 1 and 2), have a beta of less than one. These are the areas which tend to outperform when the market sells off. In contrast, cyclical styles such as small caps or growth stocks, or sectors such as consumer discretionary and energy, are more sensitive to the performance of the broader market. Although the beta can change over time as seen by the energy sector, which has become less sensitive to the overall market over the past twelve months.
What are the equity styles and sectors?
Earlier we mentioned that some equity styles have more defensive characteristics than others, and this is partly due to their sector composition. Equity styles, like minimum volatility and high dividend yield, which are more defensive in nature versus the overall market have a larger weighting towards sectors such as health care and consumer staples. In comparison, the growth style is higher beta and is dominated by the information technology (tech) sector. But these sector exposures are dynamic and can vary over time. For example, compared to twenty years ago, the small cap style has increased its share of financial and real estate companies but reduced its exposure of tech and consumer discretionary sectors. Meanwhile, the momentum style’s exposure to tech has grown as it has been the sector with positive momentum in recent years.
Sectors matter to the performance of equity styles
There are several ways of looking at the relationship between the performance of various equity styles and the inflation environment. Here we have used the headline CPI rate, but we have also explored other inflation measures, such as the core CPI rate and consensus inflation expectations. The results from using the core CPI rate were generally similar but we found no meaningful relationship between the performance of different equity styles and inflation environment defined by consensus inflation expectations.
Defining the inflation environment
We have divided the sectors into defensives and cyclicals based on their sensitivity to the overall market. Chart 1 shows that most of the defensive sectors outperform when inflation is high as they are more resilient to the increase in prices as consumers still need to buy necessities such as food and health care. The exception of communication services which seems to do poorly in all inflation environments.
At the same time, some of the cyclical sectors such as energy and financials tend to do well when inflation is high (chart 2). The energy sector's income depends on the prices of oil and gas, which is a key component of the headline CPI rate. Financial stocks tend to do well in a high inflation and interest rate environment as the net income earned by banks increase. The net interest income is the profit from lending at a higher rate over the interest paid to depositors. In comparison, cyclicals such as tech and consumer discretionary generally outperform when inflation is low. This is because when inflation is low, interest rates tend to be low. Tech stocks are more sensitive to higher interest rates because they generate a sizeable proportion of their earnings in the future, so these future cash flows are being discounted at a higher rate. For the consumer discretionary sector, some of the stocks have significant exposure to tech to facilitate their business. At the same time, when inflation rises, consumers usually prioritise spending on essential items rather than on discretionary spending on goods and services.
But the momentum style tends to perform well when inflation is low even though it is more defensive compared to the market. This might be because these stocks gain from the recovery in equities more broadly when inflation and rates are low. In recent times, the momentum style has also been impacted from an increase in the concentration of tech stocks, which tends to do well when interest rates are cut. On the more cyclical styles, growth and quality typically outperform when inflation is low (chart 4). Both sectors have a high weighting towards tech. But the quality style does not have a clear result when inflation is high, unlike the growth stocks which perform poorly. This might be because the quality index is more invested in defensive sectors. On the other hand, small caps act like the more defensive styles as they perform better when inflation is high rather than low. This is likely due to small caps have a higher weighting towards some defensive sectors and financials.
How do equity sectors do under different inflation regimes?
The more defensive equity styles tend to do better when inflation is high (chart 3). Both minimum volatility and high dividend stocks have larger exposure towards defensive sectors. Meanwhile, the high dividend yield and value indices have larger concentration of companies in the energy sector, which benefit from a rising inflation environment.
How do equity styles do under different inflation regimes?
With US inflation at 2.5%, which falls within the 2 to 3% range, the momentum style and tech stocks have tended to outperform based on the past investment playbook. More defensive sectors and the minimum volatility style have usually struggled in this disinflation environment. But market concerns over recession have meant that the more defensive areas have done well recently. Given our baseline view of no recession in the US and inflation to be headed towards 2% next year, past patterns suggest that the momentum style and tech stocks are likely to outperform.
Conclusion
“Most of the defensive sectors outperform when inflation is high as they are more resilient to the increase in prices as consumers still need to buy necessities such as food and health care”
High dividend
Min. vol.
Value
Momentum
-4
>5%
3% to 5%
2% to 3%
0% to 2%
Defensive sectors
Average annualised excess return %
Inflation regimes
Note: Returns are based on MSCI US equity style indices compared to MSCI US. The exception is small caps, which is based on S&P 600. Source: LSEG, Schroders Economics Group, 15 May 2024
Charts 3 and 4: Performance of US equity styles vs. overall market in different inflation regimes
-3
Cyclical styles
Small
Growth
Quality
REITs
Consumer staples
Healthcare
Communication services
-6
-8
Cyclical sectors
Tech
Consumer discretionary
Note: Returns are based on MSCI US equity sector indices compared to MSCI US. Source: LSEG, Schroders Economics Group, 15 May 2024
Charts 1 and 2: Performance of US equity sectors vs. overall market in different inflation regimes
Note: Beta is based on monthly returns using MSCI USA equity sector indices compared to MSCI USA. All returns are total returns in USD. Source: Schroders Economics Group, 15 May 2024.
Real estate (REITs)
Health care
1.3
1.2
1.0
0.9
0.7
0.6
0.5
Equity sector
Beta over the last 5 years
Beta over the last 12 months
Table 2: Equity sector’s sensitivity to the market
Note: Beta is based on monthly returns using MSCI USA equity style indices compared to MSCI USA. All returns are total returns in USD. Source: Investopedia, Schroders Economics Group, 15 May 2024.
High dividend yield
Minimum volatility
Small caps
Strategy of investing in smaller companies which typically are more riskier than their larger peers
Companies that are currently growing or in future expanding at a faster rate than the overall market
Companies that offer superior profitability, stable cashflow and strong balance sheets
Buying stocks that have done well on the expectation that they will continue to outperform
Stocks that trade at a lower price relative to their fundamentals such as dividends and earnings
Stocks that provide a higher dividend relative to their price, which could be because they are undervalued
Investing in stocks that have lower risk or return volatility than the broader market
1.4
Equity style
Definition
Table 1: Equity style definitions and market sensitivity
“Over and over again people say this time it’s different… and time and time again that has proven wrong”
Simon Adler, Value Equity Fund Manager, Schroders
For Schroders, maintaining a strict value discipline is central to their investing philosophy, especially in times when the value approach falls out of favour. Adler explains that holding firm to core principles is what enables the team to navigate volatile markets and periods of underperformance. “2020 was an extremely difficult year for genuine deep value managers,” he says, adding that many value investors, under pressure, drifted toward higher-priced stocks in hopes of improving short-term performance. Schroders, however, adhered to their strategy, refusing to compromise on their core value criteria—a decision that ultimately paid off when markets corrected and their disciplined portfolios rebounded. Adler stresses that this discipline isn’t just a theoretical approach but is supported by a well-defined process. Every potential investment undergoes rigorous scrutiny through “seven red questions” – a checklist designed to uncover any issues that could lead to a value trap, such as weak cash flow or an unstable balance sheet. “We work very, very hard to try and avoid value traps,” Adler explains, noting that this disciplined approach helps the team to identify stocks with genuine recovery potential. To further reinforce this, Schroders requires analyses from each named portfolio manager, who must then agree that a stock is attractive. This helps to minimise bias and strengthen the objectivity of investment decisions.
The importance of style discipline
In an era where value investing has been interpreted in many ways, Schroders remains committed to its core principles. As Simon Adler, Value Equity Fund Manager at Schroders, explains, “Value investing is about buying companies at material discounts”. Sticking to the fundamentals, he says, is essential – even during times of uncertainty. “Every single time value has bounced back and generated exceptional long-term returns,” he observes, reflecting on past cycles. Despite shifts in the market, Adler argues that fundamental human behaviours have remained consistent, making the traditional value approach as relevant as ever.
With rapid technological advancement, some investors question whether traditional value principles still hold in today’s markets. But Adler is sceptical of this ‘paradigm shift’ narrative, referencing Sir John Templeton’s famous caution: “this time it’s different are the four most dangerous words in investing.” As Adler explains, “Over and over again people say this time it’s different… and time and time again that has proven wrong.” He warns against abandoning value stocks in favour of the latest trends, instead advocating a balanced portfolio that includes value as a hedge against growth stocks the offer poor future returns. Adler also points to recent examples, such as the decline of stocks like Zoom, as a cautionary tale. Despite continued use, Zoom’s shares fell sharply post-pandemic, showing the risks of overconfidence in so-called paradigm shifts. To Adler, the potential for mean reversion supports value’s place in a diversified portfolio.
Questioning the ‘Paradigm Shift’
Looking at today’s markets, Adler identifies opportunities across diverse regions, including the US, Europe, South Korea, Japan, and emerging markets. He highlights sectors such as autos, media, telcos, and large-cap pharmaceuticals as particularly attractive. Despite screening out over 90% of stocks as potential value traps, Schroders sees considerable potential in the global market for companies meeting their criteria. This international approach allows Schroders to apply its value framework to a broad set of opportunities, benefitting from undervalued companies in both mature and emerging economies. According to Adler, the combination of strict screening and regional diversity is key to managing risk while pursuing returns.
Global opportunities with a value lens
“None of us know what’s going to happen in markets over the next 5 to 10 years,” says Adler, again, advising caution against building portfolios based solely on recent trends. A diversified value portfolio, he argues, can withstand market cycles and offer returns to those willing to wait. Schroders' disciplined, process-driven approach to value investing demonstrates the enduring appeal of this strategy. Through a combination of thorough analysis, a diverse team, and adherence to fundamental principles, Adler believes value investing remains well-suited to today’s complex, evolving markets.
Looking ahead – and staying the course
Disclaimer Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors. AdMaster # 3834033 and # 3865761
What are the challenges in equity investing?
AllianzGI Best Styles investment process is an active strategy with low tracking error and high active share, meaning the portfolio holdings deviate significantly from the benchmark. The process combines human expertise and technology, using big data, artificial intelligence (AI), optimisation, and risk models to identify investment opportunities and manage risk. This approach has been successful for over 25 years, resulting in a consistent track record and making AllianzGI one of the largest players in the factor investing space. Learn more about how AllianzGI Best Styles presents a compelling case for factor investing as a core portfolio component. Its ability to adapt to evolving market conditions and incorporate new data and insights suggests continued potential for delivering strong risk-adjusted returns for investors.
Dr. Michael Heldmann, CIO of Systematic Equity at Allianz Global Investors (AllianzGI), discusses the challenges of building a successful equity portfolio
Disclaimer Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights AdMaster #4035089
The shift from active strategies to passive investments has driven institutions to also seek new sources of outperformance. Factor investing, also known as "smart beta," offers an alternative to traditional active strategies, especially in large, liquid asset classes. Factors like value, momentum, small cap, and low volatility have been shown to provide excess returns over time. However, these factors also introduce risks that can lead to periods of underperformance.
The rise of factor investing
Despite the benefits, the performance of factor-based portfolios can be unstable and inconsistent. Factors such as interest-rate sensitivity, sector exposures, and macroeconomic factors can overwhelm expected returns from risk premia. This instability can result in long periods of underperformance, making it challenging for investors to achieve their return targets. For example, US small-cap equities may outperform over the long run, but extended periods of underperformance can erode investor confidence. The unpredictability of returns in single-factor portfolios also means that investors must be prepared for long stretches where results deviate from expectations. These risks often go unrecognised by investors relying solely on historical averages for guidance. A closer examination of specific factor performance highlights this inconsistency and the need for a more nuanced approach.
Hidden risks in factor investing
The TTO methodology gauges how long it takes for a factor to achieve an 80% likelihood of outperforming the market. Historical data shows many single-factor strategies require excessively long periods for consistent outperformance. Small-cap stocks exhibit a TTO of 17.5 years, while low beta requires an even longer TTO of 33.4 years. Such findings underscore the limitations of relying solely on single factors. This prolonged TTO presents challenges for institutional investors seeking to meet specific funding targets or achieve returns within defined time horizons. The lack of consistency and extended waiting periods often render single-factor strategies less practical for investors with near- or medium-term objectives.
Time To Outperformance (TTO): A measure of efficacy
Combining multiple factors can reduce risks and improve return stability. For example, a portfolio combining value and momentum factors can significantly shorten the TTO, to 1.9 years. However, even multi-factor strategies can fall short of investors’ needs, especially when aiming for higher confidence levels of outperformance. Adjusting the confidence level to 90% increases TTO substantially, highlighting the need for more refined strategies. Multi-factor strategies leverage diversification benefits by combining factors with low or negative correlations. This reduces the risk of prolonged underperformance associated with individual factors. Despite these advantages, traditional multi-factor approaches may still experience periods of instability, necessitating a more sophisticated methodology to achieve consistent outcomes.
Multi-factor strategies: Improvements but challenges remain
AllianzGI employs a more refined approach to factor investing which involves a more active approach to portfolio construction and the management of multi-factor portfolios. This holistic approach can mitigate inherent risks, enhance information ratios, and reduce the time to outperformance. Key elements include:
A holistic approach to factor combination
Despite the hidden risks, multi-factor strategies can offer strong potential for excess returns. The key to success in factor investing resides in how to combine factors properly through portfolio construction and active risk management. AllianzGI’s holistic multi-factor strategy, tested over 25 years, has delivered enhanced stability and reduced TTO. This refined strategy allows investors to confidently harvest risk premia while mitigating the inherent risks of factor investing. Factor investing offers compelling potential for excess returns, but hidden risks and extended periods of underperformance pose challenges. An approach that incorporates diversification, risk management, and active oversight is essential to achieving consistent results. AllianzGI’s methodology demonstrates that these challenges can be addressed effectively, enabling institutional investors to unlock the full potential of factor-based strategies. This evidence-based approach provides a roadmap for navigating the complexities of modern financial markets with greater confidence and precision.
Proven results with the holistic multi-factor approach
Diversification within risk premia: Allocating among multiple factors within each risk premium to improve results and shorten TTO. Avoiding stock overlap: Limiting the total weighting of overlap stocks to improve portfolio stability and avoid event risk. Neutralising unrewarding risks: Identifying and dynamically constraining the effect of macroeconomic factors, such as interest rate sensitivity, ensures that noises (tracking error) does not dilute performance. Dynamic portfolio management: Employing an adaptive approach to factor definition, risk modelling, and portfolio construction enable more stable returns.
Small Caps
1926-2024
1.31%
0.07
17.5 years
Large Cap Low Beta
1963-2024
-0.33%
-0.04
33.4 years
Large Cap P/B
0.81%
0.05
19.3 years
Dividend Yield
1927-2024
0.08
12.3 years
Large Cap Momentum
3.42%
0.37
4.1 years
Large Cap Profitability
1.02%
0.20
23.6 years
Large Cap Low Investment
2.20%
0.29
7.2 years
Factor
Period
Relative Return (p.a.)
Information Ratio
TTO (80% Confidence)
Table 1: Time to Outperformance (TTO) for single factors
Using the Fama-French methodology, we sorted the CRSP universe of US stocks into five size (market cap) groups using quintile breakpoints. Next, we selected the quintile of largest stocks to focus our analysis of individual factor behavior, with the exception of the Small Cap factor, which is the smallest quintile by size. We ranked stocks within that top market-cap quintile based on the factor criteria below and compared the results to the benchmark, which, in this case, is represented by the value-weighted CRSP US stock universe. • Dividend Yield: Highest quintile based on the dividend per share/stock price. • Momentum: Top quintile of stocks with highest 12-month stock price return as of one month prior to measure date. • Price-to-Book Value: Lowest quintile of stock price relative to book value. • Low Investment: Lowest quintile total asset growth over previous 12 months. • Profitability: Top quintile gross profit to total asset ratio. • Low Beta: Lowest quintile of beta calculated using trailing five years of monthly returns. Source: Center for Research in Security Prices, LLC, Compustat, and Allianz Global Investors
US Large Cap Quality
1.71%
6.6 years
US Large Cap Diversified Value
2.06%
14.6 years
US Multi Factor (Value & Momentum)
2.88%
6.3 years
TTO (90% Confidence)
4.6 years
10.1 years
1.9 years
Table 2: Time to Outperformance (TTO) for Multi-Factor Portfolios
Source: Center for Research in Security Prices, LLC, Compustat, and Allianz Global Investors
“Factor investing offers compelling potential for excess returns, but hidden risks and extended periods of underperformance pose challenges”
Factor investing has become a prominent approach in the investment world, supported by extensive academic research. This approach involves selecting securities based on specific characteristics, or "factors," such as value, size, momentum, or quality, which have been linked to superior performance over time
Click arrows below to show more of the table
Sources 1. Shiller P/E is the long-term price earnings ratio computed by dividing price by 10 year average real earnings per share. Real earnings per share is computed by adjusting the EPS ratio for the country’s consumer price index (CPI). 2. Reuters - China unveils $1.4 trillion local debt package but no direct stimulus | Reuters 3. Source: Artemis as at 30 September 2024. Benchmark is MSCI Emerging Markets.
Emerging market equities have lagged global equity markets for some time. As a result, they are now trading at attractive relative valuations, as evidenced by the Shiller P/E (a long-term measure of valuations ).
Within emerging markets, China, Brazil, Indonesia, Turkey and Korea are particularly cheap versus history, and so are reflecting a lot of bad news and pessimism already. Our view is that the best determinant for long-term returns is starting valuations – and these are certainly looking attractive in emerging markets.
Relative valuations
Over the last decade or more, many emerging markets have gained in resilience and self-sufficiency. This is largely due to the strength of the emerging market consumer, as domestic consumption is driving the underlying economies. Whereas in the past you might have bought a Western company to gain access to these changes in consumption, there is now a broad range of very high-quality domestic companies serving those new trends. This makes investing in emerging markets a real diversifier.
Strength of the emerging market consumer
Emerging market central banks were well ahead of the curve in raising interest rate, and therefore stifling inflation, leaving these economies with some of the highest real yields globally. This now gives these economies the ability to ease at a faster rate than developed economies which should be supportive to their equity markets.
Monetary policy
A lot of attention has been focused on restrictions in supply chains and the shift away from China. But the biggest beneficiaries of that shift are other emerging market economies: India, Vietnam, Indonesia, Poland and Mexico have all benefited from global supply chains starting to shift. Emerging market economies continue to have young cheaper labour forces to support this activity. This is likely to continue to boost economic growth in the future.
Supply chains
When times are bad, risk aversion can lead to indiscriminate selling. We believe this creates opportunities for disciplined investors and our process has been designed to look for the companies where the fundamentals are signalling good news, yet share prices are not reflecting this optimism.
All of this creates opportunities…
The fund has been overweight China for several years, with a bias towards value stocks. Negative sentiment had depressed share prices in very attractive companies, including banks, energy companies and state-owned enterprises. Our allocation to China outperformed despite the overall weakness in the market. In the last few months, before the stimulus announcement, pessimism reached extreme levels and with low investor positioning we felt the risk/reward payoff had become extremely favourable and increased the fund’s position in China. There is a clear disconnect between share prices and financial performance of businesses in the region. As investors remain sceptical about conditions in the economy improving, we believe a disciplined value approach can help unearth great opportunities. Recent purchases include e-commerce companies Alibaba and JD.com. Not long ago, these were consumer ‘darlings’ and acted as mainstays of many GEM investors' portfolios – today they are heavily out of favour. Yet, in both instances we are seeing catalysts for recovery. Both companies have superior cash generation and attractive shareholder return policies. We have also added to our positions in Geely (parent company to Volvo) and drug producer Sino Biopharmaceutical among others. Renewed optimism towards the market should create a favourable support for these positions in future months, yet it will no doubt be a volatile journey. Our preference for value stocks means that the margin of safety reflected in our China holdings' valuations is significant, should the market see another setback.
Our positioning
During his campaign, Trump had flagged imposing tariffs of up to 60% on Chinese imports into the US, continuing the protectionist measures introduced in his first term. It remains to be seen if this will become substantive policy or was merely campaign rhetoric. The important point, however, is this: policymakers in Beijing aren’t standing idly by while external risks escalate. Worries about tariffs and protectionist measures are not new for China and much appears to be reflected in lower prices. In September 2024, the Chinese government issued a series of stimulus announcements, making it clear that it is willing to support the economy with significant and co-ordinated moves. Following Trump’s landslide victory in November, the Chinese government announced a further stimulus package, worth $1.4 trillion .
How are you positioned in China? Has the threat of tariffs from the US changed your view?
While perhaps traditionally associated with growth investing, emerging market equities also offer attractive income opportunities. As the chart below illustrates, there are plenty of dividend-paying companies to choose from.
In addition, a number of emerging markets have undertaken reforms to become more shareholder friendly. In the case of China and Korea, they have been following Japan’s lead over recent years by instigating share buy backs, reducing cash balances and increasing dividend payouts. This means that some markets offer an interesting share buy-back yield as well as a dividend yield. While the overall yield on the index is around 3%, some good-quality companies have double-digit yields. Banco do Brasil, for example, offers a dividend yield of 10.2%. South African Nedbank has a dividend yield of 7.9% and a buyback yield of 4.6%. Read more: Emerging markets: attractive combination of growth & income
Are emerging markets attractive for income investors?
As mentioned above, we have had an overweight position in China for some time. Alongside our China overweight, in aggregate we are overweight Brazil, Korea and UAE and underweight India, Taiwan and Saudi Arabia. While we mentioned above the overall attractive valuations that EM equities are trading at, it is also interesting to note that India is the most expensive market in the world in Shiller PE terms.
We find many areas in India excessively valued, but still have substantial holdings in cheaper areas of the market. In terms of sectors, financials, consumer discretionary, utilities and industrials feature as the largest overweights. Materials, technology and consumer staples are the largest underweights. We remain heavily biased towards value stocks. The fund offers a forward P/E of 7.7 vs 12.4 for the index (a 38% discount) . We think our discipline around valuations is likely to be a rewarding strategy for the years ahead. Whilst value stocks in EM have recovered from depressed levels in recent years, the gap in valuations between cheap and expensive stocks remains stretched. This suggests there is still an opportunity. Typically, significant exposure to value stocks coincides with distressed balance sheets and volatile earnings. This doesn’t appear to be the case today, the fund offers favourable quality and growth characteristics. For instance, our net debt/EBITDA is low, and our free cash flow yield is much higher than the market.
What is your overall positioning?
Relative performance of major equity markets
Source: Bloomberg as at 30 September 2024. Indices are: MSCI for EM, Asia ex-Japan, UK and Europe, S&P 500 for US and Topix for Japan.
US 286%
Japan 85%
Europe73%
Asia ex-J 72%
UK 45%
EM 48%
Shiller P/E - EM vs S&P 500
Source: Bloomberg as at 30 September 2024. MSCI Emerging Markets index vs. S&P 500.
Shiller P/E by region
Top 5 EM countries (% of stocks paying dividends)
Source: Artemis/MSCI as at 30 September 2024.
“Emerging market central banks were well ahead of the curve in raising interest rate, and therefore stifling inflation, leaving these economies with some of the highest real yields globally”
“While traditionally associated with growth investing, emerging market equities also offer attractive income opportunities”
Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity Fund
Why is now a good entry point for emerging markets?
Many stock markets have been on an impressive run during the past year, with all major indices outstripping their historical average annual returns. The S&P 500 and the Nasdaq have delivered especially strong numbers. This has been good news for global equity investors, who will be hoping the momentum persists in 2025. The flip side is that such spectacular levels of growth inevitably stoke fears that valuations might be getting out of hand. In our opinion, whether these fears are justified very much depends on where you look. There may be particular sectors and stocks that are expensive right now, but others remain underestimated by the wider investment community. On the whole, for investors who are prepared to dig deeper in the search for attractive opportunities, the world can still be thought of as quite cheap. Here are three arenas where we continue to see real value.
The regulatory headwinds that followed the global financial crisis (GFC) may have made the banking sector seem an unpromising target for investment. Fast-forward 15 years, though, and we find some banks have outperformed tech titan Microsoft in 2024. How has this happened? The reality is that banks have become so well regulated in the wake of the GFC – and, as a consequence, so averse to lending – that they have effectively ended up flush with capital. This has enabled them to pay dividends and buy back their own shares in substantial quantities. As a result, the sector is now considerably safer and cheaper than many investors might imagine. By way of illustration, one of our own largest holdings, HSBC, currently offers a healthy dividend yield of around 6.5%. Despite this, it is still trading at well below its book value.
Capital expenditure is a major theme within our fund. The energy transition is a significant component of this allocation. More investors are taking note of this sector amid the ongoing shift towards cleaner, sustainable energy sources. Yet it is interesting to reflect on areas where investment to date may have been insufficient. Copper cable is a classic example. The electrification of society is going to require lots of it, but many of the businesses involved in its production have still to register on most investors’ radars. Take Prysmian, which is based in Italy. Its share price has risen by well over 200% during the past five years, and we believe the company is poised to benefit further from growing demand as the energy transition gathers pace.
Banks
The capital expenditure theme extends to defence. This is a sector that has become more relevant in light of rising geopolitical tensions, not least with the tragedy in Ukraine reminding Europe that war is on its doorstep. It could be argued that defence stocks might tumble if the conflicts that have dominated international headlines in recent years were somehow to end. President-Elect Trump has promised to ceases hostilities between Ukraine and Russia “in one day”, for instance. In our view, though, the sector’s newfound relevance is for the long term. Nations are conspicuously rebuilding their defence inventories, as underlined by a pledge in the autumn Budget to increase related spending in the UK. The share price of one of our top holdings, BAE Systems, has gone up by around 125% during the past five years. We feel that even now the company remains undervalued, belying its status as the biggest defence contractor in Europe and the seventh-largest in the world.
Defence
“There may be particular sectors and stocks that are expensive right now, but others remain underestimated by the wider investment community”
Jacob de Tusch-Lec, co-manager of the Artemis Global Income Fund.
With impressive market growth raising valuation concerns, Artemis' Jacob de Tusch-Lec explores overlooked opportunities in banking, energy, and defence, demonstrating where value still resides in a seemingly expensive world
Jacob de Tusch-Lec, co-manager of the Artemis Global Income Fund
Important information This Insight is provided for information only and all the information contained in it is believed to be reliable but may be inaccurate or incomplete; any opinions stated are honestly held at the time of writing but are not guaranteed. The contents of this Insight should not therefore be relied upon. It should not be taken as a recommendation to make an investment or to buy or sell individual securities, nor does it constitute an offer for sale.
Estimated Tariffs under a Second Trump Administration
Source: Goldman Sachs Investment Research, September 2024
China
40 120 90 200
25% 25% 7.5% 0%
60% 35% 10% 5%
85% 60% 17.5% 5%
List 1-2 (no consumer goods) List 3 (20% consumer) List 4a (mostly consumer) List 4b (mostly consumer)
Mexico
Very small
0-2.5%
97.50%
Auto Imports
80
22.50%
25%
Global
3100
2.7%
12.70%
All Imports
450
13.7%
53.70%
TBD
Country
Coverage/Goods
Amount ($bn)
Current Tarriff
Incremental Tarriff
Possible Final Tarriff
The market reaction to the Trump victory was mixed. It was particularly positive for US stocks, which would benefit from the lowering of corporation tax from 21% to 15%. This had a rather mechanical positive impact on equity valuations – even more so now that the proposed 28% rate is off the table. This valuation impact was in some ways offset by the negative impact of rising Treasury yields over inflationary concerns and the deficit. More generally, Trump is thought to be good for growth, due to tax cuts and deregulation, and hence cyclical industries are likely to benefit. Small-caps are likely to benefit too, reflecting optimism over corporate tax rates and lighter regulation. Industries reliant on imports are likely to be most affected, as well as countries with export-dominated sectors. Deregulation may be supportive to many industries (such as Big Tech) but we do not expect Healthcare to be among them, given previous attempts to cap prescription pricing. Tariff-exposed companies are likely to be negatively impacted. Outside of the US, the equity reaction was more mixed, with concerns over a global trade war and risks for EU exports given the imposition of tariffs. This is especially true for trade-dependent economies such as Germany. The resulting strong dollar is likely problematic for emerging economies.
America has voted for its next president: Donald Trump. Over October, the former president (and now president-elect) had managed to swing momentum in the polls back in his favour, closing the gap with Kamala Harris by election day on November 5th in what was dubbed by many to be the tightest race in history. In the event, the win was decisive, with the former president taking not just the popular vote (the Republicans have failed to do this since 2004), but also seeing a swing in his favour by almost every demographic group. Importantly, at the time of writing, the Republicans also look likely to take both the House and the Senate. Among the wide-ranging implications, the key themes that we believe will be most impactful on the economic environment and markets include the following:
•
Trade: an escalation of tariffs. As he did during his first term, Trump intends to pursue an “America First” agenda, a policy of greater isolationism and the prioritisation of American interests. This includes focusing more on ‘bilateral’ trade agreements over ‘multilateral’ agreements and reducing the trade deficit. The idea is based on reigniting home-grown growth and restoring US manufacturing. Trump has therefore laid out plans to go even further with respect to tariffs (than he did in his first term), including: o Implementation of a universal baseline tariff of 10-20%. o Increase tariffs on Chinese goods to “more than” 60%. Currently, tariffs range somewhere between 7.5-25% of goods. o 100% tariffs on non-US made vehicles. With greater protectionism and higher tariffs, trade wars could follow – an outcome that may be inflationary, given negative supply shocks. This is the largest concern voiced by economists. This would negatively affect both industries that depend on imported inputs and countries with export-orientated economies.
Fiscal policy – lower tax revenues and lower government spending: In contrast to proposals from the Harris campaign, Trump is expected to extend tax cuts he passed in 2017 under the Tax Cuts and Jobs Act (TCJA), and in some cases, cut them ever further. Policy proposals include: o Cutting corporation tax to 15%. o Eliminating tax on Social Security income, tips and overtime pay. o Lowering tax for American citizens who live abroad. Trump’s fiscal policy proposals also include reining in non-defence government spending by cutting foreign aid alongside energy and environment-related spending (we expect the Inflation Reduction Act to be repealed at least in part), closing the Department of Education, and also privatising some departments. Trump has committed to protecting Social Security and Medicare reforms from any benefit cuts. This reduction on government spending is unlikely to offset any reduction in revenue from tax cuts, however, and is likely to add to an already large deficit. The Committee for a Responsible Federal Budget estimated that Trump’s plans would increase the deficit by $7.5 trillion over the next decade – double the increase that was expected under Harris. This has placed upward pressure on Treasury yields.
Deregulation: Trump has promised “low regulations”, stating he would cull 10 regulations for every new one created. Trump has also suggested implementing a new ‘efficiency commission’ that would be helmed by Elon Musk and would be “tasked with conducting a complete financial and performance audit of the entire federal government and making recommendations for drastic reforms”. In energy, this could mean removing hurdles to oil and gas development – as was seen in his first term, where he rolled back hundreds of environmental protections. In finance, this may mean reduced capital requirements. Antitrust enforcement seems likely to be loosened, and we may therefore see greater M&A activity. In technology, we may see reduced regulation on emerging technologies such as AI – particularly if Musk is appointed.
Federal Reserve: The Federal Reserve is independent of influence from the President’s office, but Trump has made clear his dislike of the actions of current chair, Jay Powell. Powell, who was nominated by Trump in his first term, will come to the end of his second term as Chair in 2026. At the least, we expect Trump to exert dovish pressure on the Federal Open Market Committee, and Powell will probably be replaced by someone Trump believes is more amenable in 2026.
“With greater protectionism and higher tariffs, trade wars could follow – an outcome that may be inflationary, given negative supply shocks”
A Trump presidency could usher in profound shifts across global markets and the economy – and investors must navigate the balance between growth opportunities and inflationary pressures
Important information This marketing material is for professional clients or advisers only. Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Information herein is believed to be reliable but we do not warrant its completeness or accuracy. Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.
The election outcome has added another layer of potential short-term pain for the energy transition sector. However, the long-term need to transition our energy system away from fossil fuels has not changed and we continue to see a robust growth outlook for companies across the universe even in a scenario where US climate policy reversals play out to their most extreme.
The election result does not change the fact that renewable energy solutions have become increasingly competitive with fossil fuels, that electric vehicles are becoming ever more compelling with respect to their capabilities and cost, or that energy storage solutions have now become bankable. It will not change the fact that we are seeing new pockets of electricity demand globally for the first time in decades, particularly from AI-related data centre expansion, but also increased heating and cooling needs too and it will also not change the fact that many major corporates want their operations to be 100% fossil fuel free in the very near future. It will not change the fact that energy security remains a concern globally, and that renewable power is at least part of that solution, or that many economies globally are rapidly accelerating their deployment of renewables, including India and the Middle East, with growth that can help offset any potential weakness in the US. And it will not change the fact that this year will mark the first year that global average temperatures will end up more than 1.5C above pre-industrial levels, and that longer-term climate ambition globally must still be addressed. We acknowledge that if certain policy actions in the US are taken under the new administration – which are by no means guaranteed given the significant investment and jobs the renewable energy industry creates within the US – then we could see lower US growth short-term and further potential earnings disruptions. We also accept that the outcome of other elections globally this year have highlighted that other issues such as defence and inflation have perhaps become priorities over decarbonisation short-term.
Resilient fundamentals in a changing political landscape
But the longer-term, and more powerful forces of investment and technology adoption should not be forgotten, as they will be what ultimately drives the value of sustainable energy companies longer-term. Politics and sentiment will always experience cycles, but industries and businesses with competitive products can still adapt and thrive. Indeed, let us not forget that US wind and solar installations increased 50% between 2016 and 2020 when Donald Trump was last in office, with global renewable installations more than doubling over the same time. Stepping back, the bigger picture for the sector is still that: long-term growth expectations for the sector remain robust, and that even with potential US market disruption short-term, we are approaching the bottom of the capital and earnings cycle for several key energy markets and stocks. Energy transition equities have outgrown the wider market from an earnings perspective over the last five years, and they are forecast to continue to do so over the next few years as well. With through-cycle earnings growth the best indicator of long-term investment returns, the fundamental set up still looks robust from here.
Global trends offset potential US policy headwinds
We also firmly believe that some of the valuations we now see across the universe look exceptionally attractive following the recent moves, particularly if you still believe in the long-term earnings growth view above. The market capitalisation of various businesses across the space are now back to their COVID-19 lows, despite underlying earnings and cash flow being materially higher than at that time. While we acknowledge that the US election poses further short-term earnings risks, the extent to which valuations have contracted feels extreme to us. Over the last three years we have seen valuations across the sector re-trace sharply, with the sector now trading at a significant discount to wider equities, particularly relative to their fundamental growth. Although short-term reactions can always push valuations lower (as we have seen over recent days), we believe that sustainable energy equities are already more than discounting any potential fundamental impact from this election when taking a longer-term view. We would stress that investors should still be prepared for near-term volatility. With cyclical headwinds still in place (interest rates, weak consumer demand, etc.) and potential new policies disruptions to come, there is still some uncertainty ahead near-term. This may mean we do not see an immediate recovery – but instead have to be patient and wait for earnings visibility longer-term. But if you believe, as we do, that in three to five years, the world will be installing more renewables, selling more EVs, and building more storage, even with a less favourable US leadership regime, then the long-term outlook for sustainable energy equities still looks robust from here – especially with valuations across the sector now very much reset. Our key focus going forward is to be on watch for potential earnings inflections across the universe as this investment cycle bottoms, and we believe this is now the most important driver for future near-term returns. While the election may have some impact here in the very short-term, potentially pushing the recovery for some sectors and companies to the right to a degree, we think it will be relatively limited when the dust settles, and we believe that when earnings do stabilise and eventually turn, the attractive valuations in the market today create potentially very attractive risk-reward.
Long-term opportunities amid near-term volatility
“If certain policy actions in the US are taken under the new administration then we could see lower US growth short-term and further potential earnings disruptions”
For illustrative purposes only and should not be viewed as investment guidance. Past performance is not a guide to future performance and may not be repeated. The value of investment can go down as well as up and is not guaranteed. The return may increase or decrease as a result of currency fluctuations. Source: Bloomberg, Schroders – 31 October 2024. 1*Average represents an equally weighted average for selected companies in the Schroder Global Energy Transition ‘tracked universe’, which is comprised of selected companies from the ‘full universe’ with available data. Based on consensus estimates for 2YF EBITDA and 2025 EBITDA using Bloomberg Data. Change in earnings expectations is the average change from 1 January 2019 to 31 October 2024 for the universe.
Past performance is not a guide to future performance and may not be repeated. The value of investment can go down as well as up and is not guaranteed. The return may increase or decrease as a result of currency fluctuations. For illustrative purposes only and should not be viewed as investment guidance. Source: Bloomberg, Schroders – 31 October 2024. 1*Average represents an equally weighted trimmed average for selected companies in the Schroder Global Energy Transition ‘tracked universe’, which is comprised of selected companies from the ‘full universe’ with available data. Based on consensus estimates and consensus growth rates using Bloomberg Data. 2 Wider market as defined by MSCI ACWI.
Premium (%)
Relative 2YF EV/EBITDA against wider market
Average 2YF EV/EBITDA for universe*
2YF EV/EBITDA
Earnings growth (%)
2YF EBITDA revisions for the global energy transition universe* over time
2YF EBITDA growth for the global energy transition universe* over time
Earnings have outgrown wider equities over the long-term
Even if expected earnings have been trending downwards over the last two years
Energy transition valuations
Valuations have returned to attractive levels on an absolute and relative view
Alex Monk, Portfolio Manager
Mark Lacey, Head of Thematic Equities
CONTRIBUTORS
Mark Lacey, Head of Thematic Equities and Alex Monk, Portfolio Manager at Schroders consider how Donald Trump’s victory in the US election will test the renewable sector’s adaptability and resilience
Real estate investment has long been a cornerstone of diversified portfolios, but the landscape is changing. The rise of data centres, senior housing, and developments in sustainability are reshaping how real estate is evaluated and unlocking new opportunities for long-term growth.
We believe that investing in real estate in leading global cities will produce superior returns over the longer term. By investing in real estate in leading global cities, we benefit from the optionality (choice of potential uses) that results from owning land in these locations. The increasing demand driven by urbanisation and the challenges of bringing on more supply in geographically constrained areas provide these assets with strong pricing power and the flexibility to repurpose obsolete or lower-valued assets for higher-value uses. Examples include converting offices to residential properties or transforming warehouse space into data centres. We can find the best cities through our use of data. We publish the Global Cities Index. This assesses cities in four key areas: economic strength and potential, how good their transport network is, their ability and success in incubating innovation, and their environmental credentials. We believe these areas are key to a city’s success and the success of the real estate in the city.
How do you determine the optimal locations to invest?
We believe it is essential to use cutting-edge geospatial analysis, enabling precise analysis of both individual buildings and surrounding areas. For example, we can calculate travel times, assess crime statistics, and analyse competing supply. We combine data analysis with traditional real estate assessment, visiting assets to evaluate the quality of competing supply. Data science is a pivotal component, enhancing our decision-making efficiency. We seek assets with structural demand, high barriers to entry, located in growing cities. Data centres, for instance, exemplify assets with growing demand due to structural factors like artificial intelligence, alongside limited supply. This dynamic can result in both income and capital appreciation.
What are the key factors to consider before making an investment in real estate?
Over the last 30 years, the strongest returns have been generated from globally diversified portfolios. This contrasts with strategies focussed solely on single markets, such as the UK. A global listed real estate strategy offers a broader opportunity set, facilitating capital allocation to top sectors and locations. Global real estate investments provide exposure to countries experiencing faster growth, both in population and economic terms. Investing in the listed real estate sector offers access to premier operators who can achieve higher margins than peers. The sector hosts industry leaders across healthcare, data centres, storage, industrial, and residential segments, and is constantly evolving, with data centers approaching 10% of the universe, compared to the office sector at around 5. Furthermore, unlike in traditional real estate where funds may be ‘gated’, the listed sector poses fewer liquidity concerns, as shares are traded on equity markets facilitating standard investment or redemption processes like any other equity fund.
What is the best way for investors to invest in real estate?
Despite negative headlines in recent years due to higher interest rates, misconceptions persist about the real estate market's state. Rental growth and robust fundamentals are evident across most sectors. Retail, for instance, is resilient today—obsolete buildings have been repurposed, no new supply has been built, and top performers have gained market share. While offices only represent around 5% of the market index, there are opportunities, particularly for companies with new, sustainable, premium locations that attract high demand amid the return to work. Sectors showing the strongest growth include data centres, driven by AI investments, and senior housing, bolstered by ageing demographics driving demand for nursing facilities against limited supply growth.
Which sectors are likely to offer investors the strongest returns?
Political shifts can influence sustainability-related policies, yet the momentum for sustainable real estate often transcends political landscapes. Investing in sustainability potentially offers dual benefits: positive environmental impact and enhanced financial performance. Sustainable properties typically attract higher demand, elevating occupancy rates and commanding rental premiums. Additionally, energy-efficient buildings reduce operational costs, boosting profitability. Thus, irrespective of political changes, market demand for sustainable real estate continues to grow.
What implications does Trump’s victory have for sustainability initiatives within the real estate industry?
“Global real estate investments provide exposure to countries experiencing faster growth, both in population and economic terms”
Tom Walker, Co-Head of Global Listed Real Assets at Schroders
Tom Walker, Co-Head of Global Listed Real Assets at Schroders, discusses his approach to identifying prime listed real estate investments, the sectors with the strongest growth potential, and the importance of sustainability
