Global Long-Term Unconstrained 2018 Outlook
Against a backdrop of surprisingly low volatility, global markets enjoyed a stellar run in 2017. Tom Walker looks ahead to the next 12 months and beyond.
Global markets enjoyed a stellar run in 2017, with the MSCI ACWI making strong gains over the year. In particular, confidence returned to emerging markets, as a prolonged period of investor anxiety about sluggish growth (for example in China) and outright recession (particularly in Brazil and Russia) receded.
Did your strategy perform as you would have expected in 2017?
With an absolute-return mindset, a performance objective of CPI +6% and an investment horizon greater than five years, our strategy is naturally less concerned with relative performance over a 12-month period. That said, the portfolio rose ahead of the market’s return* and it is worth noting that in a sharply rising market, as occurred in 2017, we would typically expect our strategy to be up, but by less than the market.
However, volatility remained low over the period
(although it might not have necessarily felt like it given the macroeconomic backdrop). Under these conditions – a rising market with low volatility – we would expect the strategy to outperform. The characteristics we seek in stocks usually translate into lower volatility than the market. Indeed, the strategy has a beta of less than 1, relative to the MSCI ACWI.
There were a number of reasons behind the strategy’s strong performance. Firstly, three of the strategy’s holdings were subject to takeover approaches during the course of the year. Serious trade buyers seeing clear value in business models that we back, serves as a useful validation of our investment philosophy. Additionally, technology, the strongest-performing sector during 2017, is the sector where the strategy has most exposure. Finally, the strategy had limited exposure to sector laggards energy and telecoms, as so few of these companies make it through our initial screening process.
What do you think will be the key drivers for your markets in 2018?
There is certainly confidence among many industrial-exposed companies about a return to global growth and they are painting a fairly upbeat picture of the macroeconomic prospects. Were it to materialise, a global recovery would be welcome respite from the thin gruel of sluggish growth which has served as the backdrop since the global financial crisis. However, we are somewhat more circumspect. In many developed economies, the issue of low-to-non-existent productivity growth looks set to persist. Until a remedy is found, incomes will continue to flatline and consumers' purchasing power will stall. As a result, a low-inflation environment looks likely to remain.
In addition, high levels of debt may cause central banks to pause when raising short-term interest rates and the flattening yield curve is hardly bullish for the economic outlook. We are confident, however, that a portfolio of stocks able to sustain high returns for the long term will serve our investors well in this environment.
How are earnings revisions and valuations looking relative to historic averages and other markets?
There’s no escaping the fact that on traditional
‘shorthand’ measures of valuation, such as price-to-earnings (p/e) ratios, the global market looks expensive. The p/e of the MSCI ACWI is currently around 16.5x on a one-year forward basis, one standard deviation above its millennium-to-date average.† In many sectors (such as energy, industrials, utilities and staples), it would appear that belief in the potential synchronised global recovery is factored in to current valuations. In addition, the low levels of interest rates, which are likely to remain for some time, may continue to underwrite apparently stretched short-term equity valuations, such as p/e ratios.
Our approach to valuation does not rely on such blunt instruments and what may, or may not, happen to earnings revisions in the next 12 months. We invest only in business models with high and sustainable returns, which can create value over the long term and consequently generate high levels of cash. Hence our use of discounted cash flow as the cornerstone of our valuation approach. We explicitly model the next five years’ cash flows and, take a view on how returns might fade, or not, beyond Year 5.
What are the biggest risks to your markets in 2018?
In a word – complacency. The market has continued to grind higher in 2017 and this bull-market cycle is now less than three months short of its ninth birthday (March 2018). Indeed, in the 30-year history of the MSCI AC World Index, this is the only year that the global stockmarket has posted a gain every single month.* Volatility is at a multi-decade low and there is a generation of market participants who have experienced nothing other than rising stock markets.
What sustainability themes do you see yourself engaging with companies on most in 2018?
We routinely engage with all the strategy’s holdings on any issues which might impact the sustainability of returns, including environmental, social and governance (ESG) factors. Issues of increasing prominence in our engagement include: how companies are managing cybersecurity and data protection in general; their preparedness for any future move towards global carbon pricing; and board composition, including tenure, relevant experience and diversity.
*Source: Martin Currie over 12 months to 31 December 2017 in US$. All data presented is the representative Martin Currie Global Long-Term Unconstrained account. Net data is presented net of investment advisory fees, broker commissions, and all other expenses borne by investors. An annual fee rate of 0.65% has been applied for the net data. The figures provided includes the re-investment of dividends. This strategy is not constrained by a benchmark but we show it versus the MSCI ACWI for illustrative purposes only.
†Source: FactSet as at 3 January 2018.
Past performance is not a guide for future returns
Investors should also be aware of the following risk
factors which may be applicable to the strategy.
Investing in foreign markets introduces a risk where
adverse movements in currency exchange rates could
result in a decrease in the value of your investment.
Emerging markets or less developed countries may
face more political, economic or structural challenges
than developed countries. Accordingly, investment in
emerging markets is generally characterised by higher
levels of risk than investment in fully developed markets.
For Investors in the USA, the information contained
within this document is for Institutional Investors only
who meet the definition of Accredited Investor as
defined in Rule 501 of the United States Securities Act
of 1933, as amended (‘The 1933 Act’) and the definition
of Qualified Purchasers as defined in section 2 (a) (51)
(A) of the United States Investment Company Act of
1940, as amended (‘the 1940 Act’). It is not for intended
for use by members of the general public.
Any distribution of this material in Australia is by Martin
Currie Australia (‘MCA’). Martin Currie Australia is a
division of Legg Mason Asset Management Australia
Limited (ABN 76 004 835 849). Legg Mason Asset
Management Australia Limited holds an Australian
Financial Services Licence (AFSL No. AFSL240827)
issued pursuant to the Corporations Act 2001.
This information is issued and approved by Martin
Currie Investment Management Limited (‘MCIM’). It
does not constitute investment advice.
Market and currency movements may cause the capital
value of shares, and the income from them, to fall as well
as rise and you may get back less than you invested.
The document may not be distributed to third parties
and is intended only for the recipient. The document
does not form the basis of, nor should it be relied
upon in connection with, any subsequent contract or
agreement. It does not constitute, and may not be used
for the purpose of, an offer or invitation to subscribe
for or otherwise acquire shares in any of the products
The information contained has been compiled with
considerable care to ensure its accuracy. However,
no representation or warranty, express or implied, is
made to its accuracy or completeness. Martin Currie
has procured any research or analysis contained in this
document for its own use. It is provided to you only
incidentally and any opinions expressed are subject to
change without notice.
The information provided should not be considered
a recommendation to purchase or sell any particular
security. It should not be assumed that any of the
security transactions discussed here were or will prove
to be profitable.
The opinions contained in this document are those
of the named manager(s). They may not necessarily
represent the views of other Martin Currie managers,
strategies or funds.