Quality vs Value, Bond Yields vs Global Growth

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Sep 26 2018

In this week's Weekly Insights:

-Quality vs Value, Bond Yields vs Global Growth
-Aged Care: A Royal Disaster Foretold
-Rudi Talks
-Rudi On TV
-Rudi On Tour

Quality vs Value, Bond Yields vs Global Growth

By Rudi Filapek-Vandyck, Editor FNArena

On Monday, AXA Investment Managers held its annual media round table in Sydney which includes open floor conversations with a number of in-house experts who usually operate offshore.

The Global CEO of Rosenberg Equities, essentially the in-house stockbrokerage for the asset manager who thinks and operates globally, Heidi Khashabi Ridley, suggested the house view has now shifted in that increasing exposure to higher quality equities at still reasonable prices seems but the most logical/prudent strategy given the cycle is getting long in the tooth.

Admitting "defensive" today may not necessarily equal "defensive" ten years ago when Fed tightening and an end to the economic cycle triggered an extremely harsh global bear market, the view at Rosenberg Equities is that quality growth at a reasonable price pretty much resembles the best defensive asset in today's context.

Before you ask, Rosenberg Equities' definition of quality is exactly the same as the one key factor that dominates my own research into All-Weather Performers in the Australian share market: it's about the ability, as a corporate organisation, to sustainably grow revenues and profits with relatively little volatility in the uptrend.

One interesting element that rose to the surface during the open conversation between journalists and AXA experts is that research supports the perception that companies of high quality provide lots of numbers and details when issuing guidance and discussing their latest performance with analysts. Companies of lesser quality need to hide behind rather vague statements; or they cannot provide any forward guidance at all.

An equally intriguing piece of research was presented by Kathryn Mohan McDonald, Head of Sustainable Investing at said Rosenberg Equities. According to her latest paper, companies that excel in diversity are better investments than companies with a mere homogenous mono-culture characterised by less diversity.

Findings were based upon extensive data research for the top 1000 companies in the USA, with "diversity" not limited to age or gender, but including cultural backgrounds, levels of education and geographical origin. The AXA research found there is compelling evidence to make the case that more diversity is "economically correct"; it leads to positive outcomes for companies and for their shareholders.

One of the suggestions made is that more diversity in a corporate organisation acts like an "economic moat" in that it might allow the company to engender brand loyalty and encourage innovation. Is this just me, or do I see yet another direct connection to my All-Weather Stocks?



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Asset managers at Morgan Stanley highlight just how tough the overall investment climate has become in 2018. Very few assets have produced a positive return since January 1st, an observation that might have escaped investors in Australia given Australian equities are among the happy few this year.

The picture darkens a whole lot if one adopts the angle of a global investment manager based in the USA. Morgan Stanley keeps track of 17 different assets, ranging from US two-year Treasuries to global high yield bonds, to commodities, the S&P500 and MSCI China, Europe and Emerging Markets.

When measured in US dollars, only three out of the 17 assets (Australia is not included), are in positive return territory as September, calendar month number nine, draws to a close. This balance is not only the worst since the GFC, it is worse than in 2008 in the midst of the GFC!

Back then the basket of assets generating positive return consisted of US 10 year Treasuries, US 2 year Treasuries, the US Aggregate Bond Index and Emerging Markets local debt. Today, the list of assets includes the Russell 2000, the S&P500 and Real Estate Investment Trusts (REITs).

Note Morgan Stanley does not separately include the Dow Jones Industrial Average (DJIA) while the S&P US Aggregate Bond Index is designed to measure the performance of publicly issued US dollar denominated investment-grade debt.

At the very bottom of this year's table of investment returns sit (in order of worsening performance year-to-date) Emerging Market equities (MSCI EM), Emerging Markets local debt and MSCI China. The strategists do not think the timing is right to start buying Emerging Markets equities, but are warming towards local debt in Emerging Markets.

Also, the irony hasn't escaped the strategists the best performing asset class thus far in 2018 -US equities- is also the most historically expensive asset class on the board.

The strategists like the fact that gold has relatively held its own given circumstances and suggest this might bode well for the precious metal moving forward. They note the seasonally challenging period for crude oil ths year coincides with predictions of more tightness in global energy markets.


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