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Global equities: Time to consider good quality, long-duration assets

As a stronger US dollar attracts investors it might be time to consider high-quality, long-duration assets in sectors such as healthcare, says Pendal’s NUDGEM RICHYAL

A LESSON from the volatile global financial markets this year, particularly in recent weeks, has been the safe haven status of the US dollar.

Against a basket of major currencies, the greenback is trading around 20-year highs.

While equities and bonds have fallen, and crypto currencies have been dumped, investors have flocked to the US dollar, says Nudgem Richyal, co-manager of Pendal Global Select Fund.

Richyal uses a water tower analogy to describe what’s happened in financial markets in recent years.

“Financial markets are like a water tower. The US Federal Reserve has put a lot of liquidity into the system since 2008, and that’s the equivalent of filling up the water tower,” Richyal explains.

“But then there was too much liquidity in the system, or water in the tower, and the frothy stuff at the top flowed over.

“That’s the risk assets that we’ve seen come off in recent months like cryptocurrencies and speculative technology stocks.

“More recently we’ve seen a mopping up of the overflow – the excess liquidity. As the excess liquidity, or flow of water, stops, levels start to even up and that’s what’s happening now,” he says.

The disturbance in the market, or water tower, hits risky assets (or the highest water levels) most — but everything underneath is also affected.

“We are now getting to the point of last man standing, because pretty much everything has been hit,” he says.

Pendal Global Select Fund

Something very different in global equities

Where we’re at

Richyal isn’t calling the bottom of the market.

Some sectors haven’t sold down, and they remain at risk. But it might be time to put some duration back into portfolios – stocks with long-term growth prospects, he says.

“The valuations of some duration assets have become much more attractive.

“Health care is one area we like. It is a long-term play, and usually when inflation peaks, the baton is passed from energy stocks to healthcare stocks,” Richyal says.

“Healthcare is a quality, long-duration asset, as opposed to speculative tech.”

In the meantime, investors are looking for an asset that isn’t losing value.

Risk parity – a portfolio allocation strategy that uses risk to determine asset allocation – hasn’t worked well because bonds haven’t protected investors when equities have fallen, Richyal says.

“But as both equities and bonds have fallen, the US dollar has gone up. The dollar has become a stagflation hedge.

“Another way to think about it: non-US investors might be selling equities and they might be selling bonds, but they’re not repatriating dollars.”

Richyal says it’s worth remembering crypto currencies — which have tumbled in value this year but in 2022 were considered by some investors as a hedge against inflation.

“Compare that to the US dollar, which is a risk-off currency.

“There’s a big difference. It just shows there really is only one risk-off asset in the world and it is still the US dollar.”

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About Nudgem Richyal

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

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*

About Pendal

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at June 22, 2022. PFSL is the responsible entity and issuer of units in the Pendal Global Select Fund (Fund) ARSN: 651 789 678. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8:00am to 6:00pm (Sydney time) or visit our website www.pendalgroup.com * Source: JO Hambro, Morningstar universe – Global Large-Cap Growth Equity funds, Lipper survey – Sector quartile ranking: IA Global, and Lipper Global Equity Global domiciled in the UK, offshore Ireland, or offshore Luxembourg. Lipper ranking is from A GBP Class. Please note that these performance figures have not been calculated in accordance with the Financial Services Council (FSC) standards.

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