Written by Roy Leckie, Executive Director – Investment at Walter Scott & Partners and part of the team that manages the BNY Mellon Long-Term Global Equity Fund
Cast your mind back to this time last year. There had been a market sigh of relief that the terrible events of the Ukraine War had not caused the widespread disruption that was much feared.
However, concerns abounded about the health of the global economy, and central banks remained on a tightening path given unconquered inflation, with rising prices squeezing the consumer. To compound matters, Spring of 2023 saw notable casualties of over-leverage and mistaken assumptions about the perpetuity of cheap money, with the banking sector reminding investors that the monetary game had changed.
Fast forward to today, and the dire forecasts of a plummet into recession have, in the main, not materialised, although parts of Europe and Japan have had a periodic dalliance with it.
Despite 2023 not being a legion year for earnings, the upward progression of equities has reflected the easing of inflation globally, expectations of a change of course by the Federal Reserve and the European Central Bank, hopes for middling, if not spectacular economic growth, and a modestly better year for earnings.
A nuanced picture in equities
In view of interest rate cut expectations and a more benign perception of economic prospects, ‘growth’ as a category has outperformed ‘value’ across most global markets although there has been a degree of broadening.
The Magnificent Seven story, however, has become more nuanced, with a number of its posse, including Apple and Tesla, not joining in the first-quarter party. Markets have travelled a long way since pandemic lows, and with equity valuations expanding, investors will be less tolerant of earnings under-delivery.
In Europe, the current downbeat economic picture may change to a more optimistic hue as the year goes on. Rising real incomes as inflation ebbs, and the potential for a somewhat better exogenous environment, point to a slight improvement. The European Central Bank has been playing hard to get in terms of lowering interest rates given its vigilance over services inflation and wage growth, but equity markets are pricing in a sooner-rather-than-later volte face by the ECB.
But lack of macroeconomic vigour does not translate into a blanket lack of enterprise. Rather than dwelling on Europe’s economic fortunes, investors have been more focused on companies tied into long-term growth themes in the fields of AI, luxury and obesity treatment.
Our view on Europe is from the perspective of it being a habitat of global-facing companies with leading, proprietary products or services, which have prospered irrespective of the economic performance of their countries of domicile.
Japan’s pockets of opportunity
In our view, this is also still true of Japan. The current enthusiasm for Japanese equities is vested in the prospect of an escape from the deflation, improvements in competitiveness thanks to yen weakness, and moves to promote better corporate governance and returns to shareholders.
Despite a recent ‘pivot’, monetary policy remains accommodative, and unless there is a concerted pickup in real wage growth, the Bank of Japan is not likely to be in a rush towards wholesale tightening. Whatever the economic prognosis, for us, it remains home to some of excellent growth companies that are the forefront of global technological and industrial trends.
It is the case though, that Japan has been a market where last quarter, and indeed over a three-year period, growth has lagged value. A few Japanese companies continue to suffer either through currently weak trends in China, or some negative sentiment towards the Middle Kingdom.
Looking forward
After what has been a strong rally in global equities, and given lingering macroeconomic uncertainties and the current market fixation on interest rate moves, perhaps a degree of volatility lies ahead.
But from our perspective, the ‘outlook’ remains highly encouraging. Our positive view of the longer-term prospects for many of the world’s leading businesses is founded on their fundamental merits, rather than macro or market views.
Thanks to their financial strength, market leadership, and the ability to adapt and innovate, these companies are tapped into an array of growth trends that in our view, augur well for long-term returns.
Walter Scott & Partners is part of BNY Mellon Investment Management
