Ben Lofthouse, Head of Global Equity Income, believes that while disruptors threaten a number of established sectors, significant value opportunities exist, with many good-quality companies offering compelling dividend yields.
What are the key themes likely to shape markets for global equity income investors in 2019?
There are a number of themes next year that are going to be important for financial markets in general. One of the primary factors that looks set to continue is politics. Next year we hope there is resolution of some description on Brexit and that the Italian budget discussions will come to a positive conclusion early on. There are also the implications and effects of trade tariffs, notably between the US and China, filtering through to companies.
Other themes that are likely to be more fundamental are interest rates and inflation. We have seen US interest rates ‘normalise’ to some extent; unemployment is still very low in the US and there are some signs of inflation and wages impacting companies. The big question is whether other markets will be also affected. Certainly at the moment most other developed markets are not pricing in any further inflation.
Where do you see the most important opportunities and risks within your asset class?
One of the biggest risks is disruption, which we are seeing across many established sectors. A number of these are dividend yielding sectors such as media, with the entrance of companies like Netflix, and the automotive sector with increasing regulations on emissions and disruption from new companies such as Tesla. Disruption continues to be something outside of macroeconomic and political concerns that needs to examined at a stock-specific level.
Opportunity-wise, there are not many times outside of a full recession where we have seen this many stocks trading on single digit price-to-earnings ratios, with high free cash flow yields and high dividend yields. There is a lot of uncertainty being reflected in some parts of the market and some sectors, which makes for a great deal of opportunity although investors need to be careful in terms of the companies they choose.
How have your experiences in 2018 shifted your approach or outlook for 2019?
There has not been a great deal that has happened this year that will change our approach to investing. The biggest question that we were not expecting was related to economic growth in China and the measures taken to stimulate growth. Added to that is the trade tariff actions which the market had not necessarily expected and has not had much experience of in the last few decades. The key theme we will be watching for is how China will react to that stimulus and what the growth rates are likely to be there. The size of China’s economy now has significant implications for many other markets and companies around the world.
Recorded on 8 November 2018
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