How a style-neutral global equities strategy can help you better navigate uncertain markets

For months now, the market has been in constant debate about the durability of inflation and the monetary response from central banks. 

“While our conversations with company management teams suggest that inflation may have already peaked, the official inflation data in the US for the month of August spooked the market,” says Mr Robert Hinchliffe, portfolio manager and head of industry clusters at PineBridge Investments. “That said, the US labour market remains strong, with job openings picking up in August and layoffs remaining steady.”

US second quarter earnings reports have shown that companies have generally been able to navigate the complex environment well, with corporate profit-to-Gross Domestic Product (GDP) ratio remaining high. It appears that pricing power continues to be robust across most end markets, and supply chain pressures are easing on the margin. However, guidance on future quarter earnings has remained conservative, given ongoing uncertainties. 

Outside the US, China’s July industrial output rose 3.5 per cent year on year, which lagged forecasts but constituted the third consecutive month of acceleration. The country’s zero-Covid-19 policy remains a headwind and is causing an uneven recovery. In Europe, it is too early to predict the path of the conflict in Ukraine, but more cargo ships are leaving port following an agreement with Russia allowing for the resumption of grain exports, which should bode well for food inflation. 

“We remain of the view that long-term opportunities in global emerging markets are some of the best that we have seen in years. And across global equities, tailwinds such as increased global capex offer the potential for attractive investment opportunities over the medium term, given the market pullback,” says Mr Hinchliffe. 

In these challenging markets, how can investors take advantage of these opportunities and achieve above-benchmark returns without exposing their portfolios to excessive risk?

Mr Hinchliffe, who manages an active global equity strategy, says the key to investment success in this environment is to have a differentiated, style-neutral portfolio with a good mix of growth and value stocks that allows for uncorrelated returns while minimising exposure to unremunerated risks. 

Benchmarks are top-heavy, and thus may not deliver the desired diversification benefits. For example, the top 10 constituents represent close to 28 per cent of the S&P 500 Index and 16.29 per cent of the MSCI ACWI.¹ 

“We aim to consistently generate alpha across all market conditions with a highly active, differentiated, style-neutral portfolio that benefits from investment idea generation through effective collaboration across our global equities team. We focus on identifying mispriced positive company changes, constructing our portfolio to keep risk at a level similar to the benchmark with a low turnover,” says Mr Hinchliffe.   

“The level of precision we have in terms of portfolio construction enables us to carefully manage risk exposure. Are we overweight or underweight on these big weightings in the benchmark that tend to trade together? That’s how we’ve been able to generate alpha consistently at a similar level of total risk as the benchmark. And that’s how during the last couple of years, amid the craziness of the pandemic and all the different market cycles that were jammed into 24 months, we haven’t been whipsawed by the market, with our portfolio differentiated from the benchmark,” he explains.

While the direction of the global economy remains uncertain, the portfolio manager remains focused on long-running themes that he believes will bring sustained alpha for years to come such as corporate transformation, global capex investment, technology enablers, and global affluence. 

The team focuses on finding where significant changes are taking place, and then identifying the stocks that benefit most from them and can potentially generate alpha from the mispricing of corporate changes over time. Taking a global, multi-cap approach allows the manager to consider how a trend seen in one part of the world might benefit companies elsewhere. 

“The market pullback presented us with opportunities to invest in these kinds of companies, which are typically richly valued, and we believe there will be more such opportunities as markets remain in flux,” adds Mr Hinchliffe.

Footnotes:
¹ Source: S&P Dow Jones Indices and MSCI as at Aug 31, 2022. Indexes used are in USD.

Disclaimer:
All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. Any views expressed represent the opinion of the manager and are subject to change. We are not soliciting or recommending any action based on this material. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website www.pinebridge.com.sg and any other websites (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.