Finding Stability in a World Uncertain

Global Perspectives

Finding Stability in a World Uncertain

Ben Lofthouse, CFA February 2019

What major themes are impacting the global financial markets in 2019?

One of the big themes continuing from 2018 is political uncertainty. The Brexit issue in the UK is a prime example. The markets are also dealing with uncertainty in the form of trade and tariffs, particularly between the U.S. and China. The signing of the United States- Mexico-Canada Agreement in the last quarter of 2018 suggests that we may see some resolution of other major tariff and trade disputes in the future. For the moment, however, ongoing trade wars remain a concern.

Another big question centers around the growth of the Chinese economy. While our portfolio has little direct exposure to emerging markets, China has such a large economy that its health has significant ramifications for many companies as well as other economies around the world. The Chinese government has taken action to stimulate growth, and we'll be watching closely to see how its economy responds. The U.S. trade tariffs will also have an impact on the Chinese economy, but it's hard to predict just what that will be.

Another theme that may be more fundamental is interest rates and inflation in the U.S. Currently, interest rates have normalized to some extent and unemployment remains very low. There are some signs that wage pressure may be leading to cyclical inflation in the U.S., and I think the big question is whether other markets will see it. At the moment, most of the developed markets are neither seeing an uptick in inflation nor pricing it in, and monetary policy around the world remains very accommodative. If signs of inflation begin to appear, the associated changes in monetary policy could have a dramatic impact on global markets.

What effect does this political and economic uncertainty have on your management of the portfolio?

We believe the best way to protect against uncertainty is to create a portfolio of attractively valued investments that is adequately diversified across both sectors and geography.

Our strategy continues to be one of identifying companies that are attractively valued, pay a sustainable dividend and have the capacity to grow their dividends over the medium to long term. Right now, we're holding some very interesting stocks that are trading at what we believe are good valuations.

For example, in response to uncertainty around trade and the potentially harmful economic consequences of unstable relationships, we select sectors that present good opportunities and hold different securities in these same sectors around the globe, such as financial stocks in the U.S., the UK and the EU.

We see nothing on the horizon that will change our approach to investing.

What opportunities are you seeing right now?

Opportunity-wise, there have not been many times outside of a full recession where I have seen so many stocks trading on single-digit price-to-earnings ratios, high free-cash-flow yields and high dividend yields. This makes for a number of investment opportunities, although you have to be careful which ones you choose.

Our experience as active managers with proven strength in fundamental research gives us unique insight in selecting stocks. Within specific industries, even those characterized by significant disruption, we can find good opportunities.

I like to say that we often look for securities that are cheap cash cows – the ones people hate now but are likely to warm up to in the future. In these cases, we can benefit from the yields immediately, and if we're patient, we may be rewarded with share price increases at a future time.

What about risks?

One of the biggest risks when it comes to investing is disruption. We are seeing a lot of disruption across established industries, many of which traditionally pay handsome dividends. In the media sector, for example, disruption has come from the entrance of Netflix and companies like it. In the automotive sector, the disruption is caused by increasing regulations around emissions and the entrance of new companies like Tesla.

Disruption is something that must be watched at a stock-specific level rather than a macroeconomic level. We keep a very close eye on individual companies in the sectors we favor.

Another risk is from the movement to populism, which has countries imposing new regulations on industries like financial services and telecommunications in the EU and UK and utilities in Brazil. It doesn't mean we won't find opportunities in these sectors. It just means we have to be more careful in selecting the right stocks.

2018 was a banner year for global dividends. Will we see the same widespread growth in dividends in 2019?

Going forward, the pace of dividend increases could slow somewhat as companies come to terms with what is likely the later stages of an economic cycle. Any change in the availability or cost of credit could figure prominently in companies' future decisions to pay dividends, hoard cash or pay down debt.

I'd say we're cautiously optimistic about global equity growth. That said, when economic slowdowns or even recessions occur, they can be great buying opportunities. We have to be ready to find the bargains.

For additional information including Fund objectives, risks and holdings, please visit the Global Equity Income Fund page.

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