Growing concerns and increasing recession fears set the tone for an erratic second quarter in which global equities went on sale. The S&P 500 index experienced its worst half year in 50 years, down 20 percent in US dollar terms; global inflation is at a 40-year high; and the era of monetary easing appears to be coming to an end as the Fed raised policy rates twice in the past three months, with June’s 75 basis point increase the biggest step since 1994. The MSCI World index fell more than 10 percent in the second quarter, taking the loss for the first six months of 2022 to 13.5 percent.
Russia’s invasion of Ukraine, which has turned into a war of attrition, continues to weigh heavily on the global economy. Not only have cereal exports, in which the country plays a major role, come to a halt, but the sanctions imposed on Russia and the subsequent counter-reactions threaten the fragile economic growth. Putin’s virtual elimination of Russian oil and the gradual shutdown of gas supplies to Europe are causing energy prices to soar and making government leaders nervous.
Disruptions in production chains due to shortages of materials, personnel and logistical problems are also shaking economic prosperity. Stocks of raw materials such as aluminium, zinc and nickel have fallen by as much as 70 percent. Soaring electricity prices have forced Glencore, Trafigura and Norsk Hydro, among others, to cut production at loss-making zinc and aluminium smelters. Elsewhere, shortages of chips continue to plague car manufacturers, for example, leading to long delivery times. Rising inflation has led to staff strikes in some industries to bolster wage demands, which could turn fears of a wage-price spiral into reality.
China as bright spot
Amid the gathering thunderclouds, China can be seen as the bright spot in the second quarter of 2022. The strict Covid measures that kept parts of the country locked up and thus also contributed to disruptions in production chains have been eased. The reopening of the economy combined with new fiscal and monetary stimulus measures boosted Chinese equities. The MSCI China index closed the second quarter with a gain of around 10 percent, thanks to a strong performance in June.
Rising inflation and rising interest rates have widened the dispersion between investment styles and sectors. Growth stocks, which have long benefited from low interest rates and in some cases posted stratospheric returns, have fallen prey to the gravitational pull of monetary tightening. Losing technology companies, stocks traded at very high valuations, as well as companies heavily dependent on consumer spending, have been sold off. By contrast, value stocks and companies paying a robust dividend - after years of being ignored - were in demand.
As a result, the MSCI World Value index was able to limit losses to 5.9 percent over the past three months, with dividend stocks in the MSCI World High Dividend Yield index doing slightly better, posting a modest loss of 2.9 percent. The healthcare sector performed strongly, with Bristol-Myers Squibb and Merck among the best-performing stocks in the dividend index. Unsurprisingly, oil companies performed strongly, but defence companies, miners and tobacco companies were also among the best-performing stocks.
Gavekal Global Equities
The top five mutual funds in the Morningstar category of global large-cap equities mixed on the basis of performance over the first six months of 2022 are led by Gavekal Global Equities, which, although it suffered a loss of more than 5 percent in the second quarter, is able to post a positive return of 6.4 percent over the first six months thanks to a fine double-digit performance in the first quarter. The fund is managed by Gavekal founder Louis-Vincent Gave with support from three analysts. The strategy combines different investment styles in the portfolio: structural growth, cyclical growth, defensive stocks and counter positions. This results in a portfolio of 35-50 names, in which the preference for the commodity and energy sectors has played an important role in the outperformance in the first half year.
JOHCM Global Opportunities
A loss of 3.7 percent in the second quarter still leaves a positive return of almost 2 percent for JOHCM Global Opportunities over the first six months. Fund managers Ben Leyland and Robert Lancastle identify long-term trends and then select high-quality, undervalued companies that can benefit from these trends. Absolute valuations are central to this process. The concentrated fund, which has 37 positions, benefited from an overweight in the health and energy sectors and an underweight in consumer discretionary and technology companies. The allocation to lower quality companies also benefited the fund over the period. The largest contributor to returns was positions in Progressive, Galp Energia and Shell.
State Street Global ESG Screened Managed Volatility Equity Fund
In fourth place is the State Street Global ESG Screened Managed Volatility Equity Fund. This fund combines a focus on low-volatility stocks with a sustainability overlay. The conservative approach protected the fund well in a depressed market in the second quarter. It was even one of the few funds to come through the last three months with a modest positive return. The filters the fund applies bring it close to the value column in the Morningstar Style Box, which has helped it in the first half of the year. The starkly different sector allocation, with a heavy overweight in utilities, healthcare and defensive consumer goods, has also contributed positively.
Performance as per Netherlands fund class:
Performance as per Belgian fund class:
Jeffrey Schumacher is director of research at Morningstar. Morningstar analyses and rates mutual funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.
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