Global equities: Be patient, but ready to pounce

Most equity markets are in a drawn-out, bottoming process and patience will be required as we wait for the dips, says Pendal’s CHRIS LEES

• Investors are looking beyond a potential recession
• Quality growth stocks favoured
• Find out about Pendal Global Select Fund

MOST equity markets are in a drawn-out, bottoming process – but patience is still required in the wake of last month’s rally and potential recession risks.

That’s the message from Chris Lees, co-manager of Pendal Global Select Fund.

“China’s re-opening and signs that disinflation is prompting a slower pace of interest rate rises buoyed markets in January.

“So far this year, these two positives have offset negative earnings revisions as equity markets try to look through the much-anticipated recession,” Lees says.

The bottoming process will take time, he says.

Investors will take on more risk on some occasions, and then reduce risk, as they manage their portfolios for the period beyond any short-term downturn.

Lees says there are improving relative fundamentals and share prices, and attractive valuations in several segments of the global equity market.

• Quality growth stocks, many of which are already down up to 50 per cent
• UK and European global champions, plus Japanese exporters
• Emerging markets domestic consumption stocks
• Stocks exposed to China’s reopening and recovering economy

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“But given the recent rally and 2023 recession risks we will wait to buy the dips throughout the year,” he says.

The bear and bull scenarios

Lees and co-manager Nudgem Richyal’s current scenario analysis is 50 per cent bullish and 50 per cent bearish on equity markets.

“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or a larger event such as a contagion,” Lees says.

“Medium-term reasons to be bullish include the Fed regaining credibility with inflation and interest rates stabilising this year.”

Beneath the 50 per cent bullish, 50 per cent bearish forecast are three scenarios. The first, which Lees and Richyal assign a 40 per cent probability to, is a rally led by quality growth stocks.

“It is probably nearer the end of the bear market for economically resilient, quality growth stocks that are already down 30 to 50 per cent after their 2022 interest rate shock,” Lees says.

The second scenario, which the fund managers assign a 10 per cent probability to, is a rally led by cyclical value stocks.

“In the case of these stocks, it is probably nearer the beginning of the bear market given their recessionary earnings risk. The question is whether investors will look through this?” Lees says.

The final scenario, which Lees and Richyal assign a 50 per cent probability to, is that equity markets keep falling. In that case defensive stocks are more attractive options.

“Healthcare is our biggest position relative to benchmark given the sectors positive fundamentals, valuation and trend,” Lees says.

About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach. Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.