Concerns over the source of stock market gains, levels of global indebtedness and ongoing trade disputes between the US and China are among some of the key risks worrying investors, according to Sarasin & Partners chief investment officer Guy Monson.
Veteran investor Monson said while there are a number of concerns for investors, there are ways that they can mitigate these risks within their portfolios.
Indeed, one of the biggest concerns for global investors has been around US valuations as the market makes up a big part of global equity mandates given its size.
The Sarasin IE Global Equity Opportunities fund manager said US equity returns had been momentum-driven rather than from earnings growth, or, put another way, that the index has risen faster than profits.
“This increases the risk of a technical correction as central banks gradually dial back policy,” said the Sarasin chief investment officer. “The S&P 500 index has outperformed underlying corporate profits (growth) by the largest margin that we’ve seen since the 1999-2000 tech bubble.”
Source: Sarasin & Partners
Despite this concern, Monson said investors shouldn’t walk away from high growth areas such as robotics, automation and digitalisation.
“Look for lower valuation solutions,” he said. “In the auto industry sector look for the miners who supply the copper, the cobalt and the nickel as we move to an electrified/hybrid world.”
Monson said other examples could be found in the financial services industry, which is likely to benefit from digitalisation trends but are available at more attractive valuations.
Additionally, the Sarasin chief investment officer said that investors concerned by US valuations may look to mitigate risk by exploring popular themes in alternative geographical regions.
“Look at markets outside the US, many of the same themes are available at lower valuations,” said Monson. “This has been a something of a ‘graveyard trade’ in past years but I think there is real momentum beginning to be seen in some areas of European and Asian equities.”
The second risk for investors is global levels of debt, which Monson said has been demonstrated more “alarmingly” recently by increased leverage in emerging markets.
As such, Monson said investors should be more selective in their emerging markets equities exposure and focus on quality of balance sheets, governance and direction of economic momentum which has driven stock prices more recently.
Source: Sarasin & Partners
Another potential issue surrounding the increased level of indebtedness is weaker covenants, which has favoured borrowers over lenders.
Monson said: “That is the sort of unfortunate trend we saw in 2008-2009 in the financial crisis and [is now] coming back.
“Be careful about high yield and emerging bond markets, which have been an attractive area for some.”
He added: “Don’t worry if your bond portfolio looks a little bit dull. I might be better not to be in some of the high yielding sectors as global debt levels continue to soar.”
Finally, Monson noted the recent concerns over a trade war between the US and China, as president Donald Trump has threatened to impose higher tariffs in retaliation over alleged intellectual property theft.
While global growth has risen strongly in recent years, the threat of a trade war between two of the largest global economies has chilled markets since the start of the year.
“What worries me is that the US stance – particularly against China, but to a lesser extent against Europe – is broadly operating with bipartisan support,” he explained.
Monson said support for the renegotiation of trade deals had come from both sides of the political divide, suggesting that the president might be emboldened to strike new deals in greater favour of the US.
“That means a lot of these trade disputes are going to be a lot longer and a bit tougher than perhaps we expect at the moment,” he said.
The Sarasin chief investment officer said it could be a particular problem for countries with large trade surpluses, particularly in Asia and Europe.
“Be careful of the very aggressive export names. Look for some of the domestics [stocks], in terms of sectors that are not particularly part of the trade momentum pattern,” he said.
“Pause a little bit in the build-up of emerging equity positions… and in the long-term expect the dollar to go down and the euro to go up to address some of internal balances.”
Monson has been a co-manager of the £171m Sarasin IE Global Equity Opportunities (GBP) fund since late 2015, working alongside Alex Hunter.
The fund targets long-term growth through a portfolio of global equities. Its largest geographical exposure to North America, which represents 37.8 per cent of the portfolio, followed by Europe ex-UK (23.7 percent), UK (14.5 per cent) and emerging markets (11.2 per cent).
The largest holding in the fund is US banking groups JP Morgan Chase & Co (4.5 per cent) and Citibank (4.2 per cent), and Royal Dutch Shell (4.2 per cent).
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over three years the fund has returned 34.79 per cent slightly lower than the average IA Global sector peer’s gain of 36.02 per cent and a 24.16 per cent rise for the MSCI AC World index.
The fund has an ongoing charges figure (OCF) of 1.25 per cent and a yield of 2.69 per cent.