How has Newton’s Global Income strategy held up so far in 2019?
What happened when the market got the central bank withdrawal jitters? Nick Clay, manager of the BNY Mellon Global Income Fund, offers his overview of Q1.
The first quarter of 2019 got off to an amazing – if unsurprising – start. It was unsurprising because in January, the US Federal Reserve and many other central banks duly revealed their addiction to feeding asset markets by once again turning dovish, in response to the market’s withdrawal shakes in Q4 2018.
Fed Chairman Powell’s U-turn was so abrupt that he has been elevated into the ‘put’ hall of fame. Alongside the Greenspan put, the Bernanke put and the Yellen put, we now have the Powell put. And so, in true Pavlovian style, off roared markets again, to the second best quarter in MSCI World market returns on record (since 1988). However, such predictability in the market’s actions does not diminish how amazing this was; amazing in that here were the markets celebrating that interest rates had peaked at a mighty 2.5% in the US, 0% in Japan and -0.4% in Europe! Surely the strong message is that it demonstrates how fragile our economies must be if this is as high as we can get the cost of money to be. Further, amazingly once again, the markets seem willing to assume that an individual (Powell) has the ability to control markets and to stop them falling. This blind conditioning is one of the more scary consequences of ten years of quantitative easing.
Nevertheless, despite the euphoria of headline markets, underneath, a change was occurring. Over the first quarter, the marked decline in global-bond yields, the inversion of the US yield curve in many places, along with a continued deterioration in economic data across the globe, led to a change in the leadership of the markets. Cyclicals and financials began to suffer and large growth (FANG) and bond-like stocks outperformed. By the time we reached May, economic weakness was starting to become a major concern and then US President Donald Trump sent that tweet to destroy hopes of a trade deal with China. The hardening of attitudes between the US and China meant May saw a return to weak markets, fear, and a cry for help from the Fed, as bond markets priced in more than one rate cut in 2019. Now, 2019 is shaping up to look more like 2018 than the perfect 2017, i.e. one of increased volatility (in other words a normal market backdrop).
The strategy, somewhat surprisingly, has outperformed this strong backdrop, despite only a minor correction in May. This is unusual on the face of it – we tend to underperform the rampant chase to the summit – however the rotation in market leadership described above played to the strengths of the fund – stocks less economically sensitive to the market cycle, with strong balance sheets, and sustainable business models. Companies such as Cisco, Informa, Paychex and Pfizer all performed well. The overweight in consumer goods and underweights to financials and mining all benefitted performance. Yet the FANG stocks were still a drag on performance (Microsoft, Facebook, Apple and Amazon). However, the strategy offset this through two strong contributions from individual stocks, Coty and Qualcomm.
Coty has had a volatile journey with the integration of the P&G cosmetics and fragrance business, posted results which were better than feared. This was in keeping with the evidence we had been monitoring in the company, but certainly surprised the market, leading to a strong rally. Shortly after, the JAB family then made a tender offer for 60% of the company (they already owned 40%) which duly pushed the shares higher still. We had been buying the stock on the previous periods of weakness, and we did not sell any of our stock to management.
Qualcomm rose 55% in a matter of days on a good set of numbers and then again on the surrender of Apple in the drawn-out court battle between them. Apple agreed to pay back owed royalties (worth 10% of Qualcomm’s market cap at the time) and, more importantly, signed a six-year deal to put Qualcomm’s chips in its phones on terms very similar to previous deals. This omission of Qualcomm’s value was enough to make Intel admit defeat on the same day and announce that it was pulling out of 5G chips. The removal of the downside scenario in the investment thesis (no Apple forever) meant the risk/reward outlook on Qualcomm remains attractive. And then, as with any good story, came the twist. A Federal Trade Commission case (FTC) case against Qualcomm for anti-competitive behaviour brought during the Obama presidency was upheld, further decreeing that Qualcomm re-write all their royalty terms with every customer in the world! This hit the shares hard. We have bought more as the ruling will be put on hold and sent to appeal. We believe there is a high probability of a reversal of the ruling, a view supported from the most unlikely of sources, the FTC itself. Despite winning the case, a senior member of the FTC has made a statement to say he disagrees with the ruling, and that it should be over turned! More twists to come here we feel.
The weakness in May also saw the strategy return to type and outperform in a weak and more volatile environment to put the strategy ahead on the year.
We believe the strategy finds itself in a strong starting position for what is most likely to come. The outlook is one of slowing economic growth, with some areas of the world now in recession (parts of Europe, Japan again). We suspect that interest rates and yield curves will fall further as central bankers react. However, there is a clear message appearing that the next wave of QE (feeding) will take a different form from the last ten years. Simply supporting asset markets to the benefit of a handful of people has become unacceptable. Now, stimulus must be seen to be directed to the masses. Populism is rising and populist parties are floating up as a consequence. Such parties are promising the earth to all, with no real possibility of delivering on their pledges. A shift from QE towards fiscal stimulus, (tax cuts, building things etc.), to finance government largesse (see Modern Market Theory (MMT) for the extreme end of this approach) means that the Pavlovian response of central banks to feed markets will be misplaced.
Already, the ultra-large companies are coming under government investigation; stimulus and benefits will be directed at labour not capital, and available liquidity will be directed at governments not corporates. Margins and business models will come under pressure and thus the future path of markets is most likely to be one of volatility rather than straight up gains.
Arguably, the backdrop that began 13 years ago, when iphones were just beginning, Facebook little more than a university project, Amazon simply a bookseller, and QE pushing markets ever upwards, has been the worst of all worlds for an income fund, and yet we have beaten the market! Now, we believe the next ten years will be much more suited to the disciplines of this strategy, putting us in a strong position to manage your clients’ money in the most appropriate and achievable way as the world moves to the next chapter.
Newton Global Equity Income Strategy Performance
12 month returns, %
Mar-18 to Mar-19
Mar-17 to Mar-18
Mar-16 to Mar-17
Mar-15 to Mar-16
Mar-14 to Mar-15
Calendar year returns, %
Comparative Index = FTSE World TR
Source: Newton, close of business prices, 31 March 2019. Performance calculated as total return, income reinvested, gross of fees, in GBP. Fees and charges apply and can have a material effect on the performance of your investment.
Past performance is not a guide to future performance.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
Objective/Performance Risk: There is no guarantee that the Strategy will achieve its objectives.
Currency Risk: This Strategy invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Strategy.
For Professional Clients only. This is a financial promotion and is not investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.