Taking an active and selective, forward-looking approach to global stocks has become increasingly important in today’s investment landscape, where extreme volatility can quickly rock markets – and turn short-term views on their head.
Although beta had driven returns for many years in the lower-for-longer interest rate era, the U-turn in 2022 saw inflation and rates rise dramatically and has caused beta to quickly become a smaller contributor to total returns. The evidence is the mostly flat to negative performance of global equity markets over the past two years amid heightened volatility.
This means finding alpha has become essential. And with this shift in focus, investors must look past the short term to actively seek companies with the potential to contribute alpha via agile management, strong pricing power, robust financials, and competitive positioning.
Looking beyond volatility
Persistent uncertainties make identifying quality companies tougher but also create the opportunity for active management in today’s global equities environment. Market participants continue to debate the resilience of the global economy, the likelihood of recessions, and the persistence of high inflation and interest rates. These dynamics in turn create further divergence in opinion about how aggressive global central banks must be to navigate shifting goalposts.
A case in point is the blip in the trajectory of US inflation to start the year. This reflected the recent trend of rising US retail sales and employment levels, which quashed expectations for a recession to kick-start 2023. US consumers have continued to spend, and coupled with China’s reopening, domestic consumer spending in key global markets continues to defy bearish expectations.
This bodes well for consumer-oriented businesses, especially those well-positioned to capitalize on rising global affluence and new technologies, and those with the strategic flexibility to evolve. These include, for example, luxury products, digital advertising, and companies with proven management teams.
Yet despite this positive sentiment, we believe investing based on a short-term outlook can be excessively – and unnecessarily – risky. In late February, for example, a large US big-box retailer reported December 2022 as one of the best months in its history. Yet at the same time, the company said it was cautious, given so many “unknowns.”
Amidst current market volatility, active management presents a unique opportunity for investors looking to build a diversified portfolio of global equities. With an active core strategy, investors can capitalize on the market inefficiencies and mispricings arising from divergent views and changing market conditions, enabling them to construct a portfolio that is well-positioned for long-term outperformance potential while also being actively managed for risk.
Finding reliable alpha
In a market that continues to differentiate between companies that are delivering results and those that aren’t, many businesses linked to key longer-term structural themes are showing resilience from a portfolio perspective.
Less affected by current market conditions, evergreen investment ideas that remain intact include projects to improve the environment, rewire supply chains via nearshoring, upgrade productivity via automation and digitalization, and boost efficiency.
Supported by substantial spending by the public and private sectors, these longer-term themes appear poised to deliver compelling opportunities to earn alpha for the next three to five years, and likely beyond.
Innovation in healthcare is also increasingly compelling, including emerging therapies to treat illnesses and conditions such as cancer, autoimmune disease, diabetes, and obesity. Biotech is another promising sector, with new drug developers as well as their outsource partners and technology enablers working to create breakthrough treatments and solutions. From gene editing to precision medicine, the industry is evolving rapidly, with the potential to significantly improve patient outcomes and transform the healthcare landscape.
Many structural themes also dovetail with efforts to achieve desired levels of sustainability across environmental, social, and governance (ESG) themes. Companies may be winning or losing business based on how customers, who value sustainability, score them on related criteria, including social impact, inclusivity, labor practices, etc. As this becomes more commonplace, we would expect companies with practices that resonate with their customers to have a competitive advantage.
We identify potential investments by targeting a single market inefficiency: the mispriced potential improvement in company fundamentals over the medium to long term. These inefficiencies can be caused by a lack of understanding about a company’s strategy along with other factors, including behavioral biases, information asymmetry, and liquidity constraints. In such cases, some quality companies may be undervalued due to the broader market sell-off.
Perception around ESG positioning is another source of market inefficiencies. For example, a company that is perceived to be environmentally friendly or socially responsible may be overvalued by the market, while a company that has a poor, but improving, ESG score may be undervalued. This may lead to a mispriced improvement in company fundamentals over a three- to five-year timeframe.
Access to a wide choice of stocks is also key in being able to maximize an allocation to global equities. The pandemic and post-pandemic periods have clearly tested companies, and volatility continues to differ from one region to the next, creating varied opportunities at different points in time. A wide opportunity set allows investors to tap these opportunities as they arise.
We believe that collaboration, knowledge-sharing, and debate among a diverse team are critical to consistently identifying the mispriced potential improvements of select companies when looking at a broad opportunity set. With this in mind, the collective efforts of our 50-plus investment professionals – over half of which are located in Asia – result in thousands of company meetings throughout the year to feed our flow of information and serve as a primary source of investment ideas. Notably, we’re finding that the best way to invest in Asia, for instance, may often be through companies listed in developed markets – further reinforcing the value of working with a global opportunity set.
The global equities landscape remains uncertain, with extreme volatility posing significant risks to short-term investment strategies. As beta has become a smaller contributor to total returns in the wake of rising inflation and rates, investors must seek alpha via companies with agile management, strong pricing power, robust financials, and competitive positioning. While investing based on a short-term outlook can be risky, an active core strategy offers the opportunity to own a portfolio of high-quality investments that is well positioned for long-term outperformance while also being actively managed for risk.
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.