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Perspectives Global Equities

Key Points:

  • Economy and markets - Global equities suffer sharp declines; economic growth slows
  • Factors - Low Volatility performance rebounds to crisis levels
  • Earnings - There may be trouble ahead
  • Valuation - Mispricing presents opportunity

Economic and market comments

Global equities posted sharp declines in the final quarter of the year, falling by 13.3% in US dollar terms as measured by the MSCI World index. Market sentiment was affected by a number of concerns, ranging from the speed of interest rate rises in a context of slowing global economic growth, to the ongoing trade dispute between the US and China. US equities came under significant pressure, further rattled by political turmoil in Washington including the US government shutdown. European markets also struggled, the general themes above being compounded by Brexit uncertainties and tensions around Italy’s budget. Asian markets were dragged lower by trade tensions and underwhelming economic data releases. Japanese stocks collapsed in December and the Yen safe haven appeal pushed the currency to an eight month high against the US$.

As Exhibit 1 illustrates, safer, less volatile and higher dividend yield areas of the market such as utilities, real estate and consumer staples fared better than most, while investors took profits in areas that had performed strongly in prior periods (e.g. technology), as well as areas more sensitive to the economic cycle (e.g. industrials). The energy sector was the worst performer – unsurprisingly so, considering the near 35% decline in Brent crude prices in the final quarter of the year and worries over the global economic outlook. This picture was generally repeated across most regional markets, as can be seen in Appendix I.

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The Factor Monitor (see Exhibit 2) calculates the performance of companies that rank highly (top 30%) relative to those that rank poorly (bottom 30%) on each measure. This best-versus-worst performance spread allows us to characterise a given period according to factor dominance and provides insight into the drivers of return in the market. For each factor we measure the performance of the best (top 30%) of the market by square root of market cap on a regionally neutral basis, rebalanced every month during the timeframe shown. Returns of the factor "portfolios" are calculated on a dividends reinvested basis and shown gross of management fees and in USD terms. Past performance is no guarantee of future performance. Please note that the factor "portfolios" are (i) hypothetical in nature and used to illustrate market dynamics in the past, (ii) not actual Rosenberg Equities portfolios, (iii) not available for investment, and (iv) should not be understood as being representative of Rosenberg Equities Sustainable Equities strategies.

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