The next decade in markets is going to look very different to the previous one as investor’s go-to highp-growth stocks will struggle, according to Premier Miton manager, Gervais Williams.
There will be many differences between the next 10 years and the preceding decade, he said, headlined by a slowdown in China, which has been a “cornerstone of growth in markets for the past 30 years, but that is going to become much more problematic”.
As globalisation and outsourcing has boomed China has become the hub for these demands, emerging as the lead manufacturer and exporter for the world.
It has been the most dominant market in the emerging markets, accounting for 34% of the MSCI Emerging Markets index.
Over the past 10 years MSCI China’s returns have stretched well ahead of MSCI Emerging Markets, as the below chart shows.
MSCI China vs MSCI Emerging Markets over 10yrs
Source: FE Analytics
Recently, however, the Chinese market has been the source of negative headlines after the ruling Chinese Communist Party announced harsh regulations on its education stocks, which caused a sell-off in its tech names.
The MSCI Golden Dragon index, made up of Chinses large and mid-caps, has lost 7.2% since the regulations were announced in late July.
MSCI Golden Dragon index since 23/07/2021
Source: FE Analytics
The macroeconomic picture around China has already been troubling as tensions with the US and their aggressive tactics taken against Taiwan have troubled the global community.
Williams said he doesn’t expect much more growth in the region during the next 10 years. “I think it’s very hard to get big companies and small companies to grow there,” he said.
The second thing is an end to investors buying rapidly growing stocks, a trend which has dominated the past decade in markets, Williams said.
The dominant category of stocks within this have been tech names, spurred by the increasing reliance on technology across almost every industry and activity.
The S&P 500 is largely made up of these types of companies and, thanks to their popularity with investors, has experienced some of the biggest returns and growth in the past 10 years.
Comparing it to the FTSE 100 for example, which has a lack of tech-style stocks, the S&P 500 has beaten its UK cousin three-fold.
S&P 500 vs FTSE 100 over 10yrs
Source: FE Analytics
Williams said investors have been happy to buy, what he called “unicorns,” – extremely high-growth companies, where share prices have risen at a faster rate than the underlying assets of the business.
“I don’t think that’s going to be the future,” he said, noting that asset prices were already near their peak.
“I therefore think that the UK stock market will outperform most others, including the US,” Williams said, as income stocks become the more desirable option in those market conditions.
This growth outperformance has been so substantial in the past 10-20 years that it hasn’t mattered what you held, as long as it was growing.
Williams manages two FE fundinfo Five Crown rated funds, Premier Miton UK Multi Cap Income and Premier Miton UK Smaller Companies, and even in his own funds, which have both outperformed its sectors and the wider UK market in the past decade, investors would have made more investing in the NASDAQ index, the manager said.
Indeed, the multi-cap fund marked its 10-year anniversary having made a total return of 243.9%, well ahead of the average IA UK Equity Income fund (110.6%) and the FTSE All Share’s 108.7%, yet behind the NASDAQ.
Gervais William’s funds vs FTSE 100 and NASDAQ over 10yrs
Source: FE Analytics
But if assets prices don’t go up, like Williams is forecasting, then investors will need to be more selective about what they own if they want to generate returns.
Williams hoped that the domestic market would be ideal for this because, as it has a “much broader universe of companies”.
“We think that the opportunity for UK funds to deliver a premium return will be there,” he added.