In the turbulent first quarter of 2022, inflation and the pandemic gave way to the Russian invasion of Ukraine, and resurfaced. Yet deep losses were recouped, and some investors even posted double-digit gains. This week in the Morningstar top five: mutual funds in the global large-cap equity category mixed.
What began with nervousness in financial markets about rising inflation, rising interest rates and the accelerated withdrawal of monetary stimulus by central banks, turned into an almost unreal sense of dismay as a pitch-black scenario unfolded when Vladimir Putin ordered his Russian army to invade Ukraine on 24 February. The brutal invasion, the ensuing humanitarian tragedy and the threat of further escalation of the conflict into NATO territory led to far-reaching sanctions against Russia and Russian public figures, arms supplies from Western countries to the Ukrainian resistance, but also to hypersensitivity on the financial markets. Yet, at the end of the first quarter, there is a glimmer of hope for an improvement of the situation now that an agreement is being negotiated.
The war made Russia a pariah in the financial markets, but despite the limited size of the Russian economy, Russia’s economic isolation and the stagnation of Ukraine’s economy are having a major impact on the global economy. The prices of raw materials, especially gas and oil, but also wheat and nickel, for example, rose sharply. This further eroded people’s purchasing power, for example through higher energy bills, more expensive petrol or higher spending on daily shopping. Inflation, which was already on the rise, shot up further and reached levels not seen for decades. Disruptions to production chains, another problem that has limited industrial production for some time, became more intense, while sky-high freight prices further exacerbated the problem.
Coronavirus, too, despite all the relaxations that have been put in place, continues to leave its mark on global productivity as China maintains strict lockdown rules for economic centres such as Shanghai and Shenzen, among others. The threat of an impending recession hangs over the market like a dark cloud.
Meta lost $200 billion in market cap
The first quarter of 2022 was also turbulent for companies. Meta, Facebook’s parent company, lost more than 200 billion dollars in market capitalisation after it announced disappointing quarterly figures, pointing to fiercer competition from other social media apps and pressure on advertising revenues. Netflix was also hit hard on expectations of slowing subscriber growth, while Spotify and PayPal also suffered after disappointing forecasts. For more speculative, emerging, but loss-making growth companies, the first quarter was painful anyway, as investors took a more critical look at the valuations of these stocks, partly because of rising interest rates. Nevertheless, it was not all doom and gloom for growth stocks, as the most robust companies presented excellent results, including Amazon and Apple, which earlier this year became the first company in the world to break through the 3,000 billion dollar market cap barrier.
Despite all the disturbing news that gripped investors during the first quarter, financial markets recovered well from the 10-20% price correction during the quarter. The S&P 500 index managed to limit the damage in euros to a loss of 2.6%, while the MSCI World index lost a little over 3%. It did, however, mean an abrupt end to a series of seven quarters of positive returns for the global index. UK equities excelled, helped by the listings of major oil and mining companies, which make up almost a quarter of the index. Emerging markets lost out. Russia, which was dropped from the leading indices after an invasion, and investors in China also took above-average losses.
Energy performed best
The sector that performed best by far in the first quarter was energy. A plus of over 33% puts the sector in a solitary position and follows an excellent 2021 in which the MSCI World/Energy index gained over 50% in value. The index’s total return since January 2021 is 101%. The commodities sector also ended the quarter in the plus, as did the utilities sector. The sector rotation and associated style rotation from growth to value is underlined by the three worst performing sectors in the first three months of 2022: the sector indices for cyclical consumer goods, communication services and information technology are all at least 8% in the red. The MSCI World Value index managed a positive return of 1.5%, beating the growth index by over 9 percentage points.
Gavekal Global Equities leads
The top five mutual funds in the Morningstar category of global large-cap equities mixed on the basis of the return for the first quarter of 2022 is led by Gavekal Global Equities, which not only managed to achieve a positive return, but also a handsome double-digit return. The fund is managed by Gavekal founder Louis-Vincent Gave with the support of 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, where the preference for the commodity and energy sectors played an important role in the outperformance in the first quarter.
JOHCM Global Opportunities second
JOHCM Global Opportunities takes second place with a return of over 5%. Fund managers Ben Leyland and Robert Lancastle identify long-term trends and select high-quality, undervalued companies that can benefit from these trends. Absolute valuations are central to this process. The 39-position concentrated fund benefited from both sector allocation and stock selection in the first quarter. The overweighting of utilities (16% of the portfolio) and healthcare (over 15%) provided a defensive tilt that helped limit damage. The 13 percentage points underweighting of technology stocks also provided a tailwind. Among the strongest performing stocks in the portfolio are mining company Rio Tinto and oil company Galp Energia, as well as Thales and L3Harris Technologies, companies active in the defence industry. The managers describe the market’s revaluation of the defence sector, both on the basis of expected growth and the sector’s investability, as an interesting development.
This article originally appeared in Dutch on InvestmentOfficer.nl.
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