Ben Lofthouse, Head of Global Equity Income, believes that despite the difficulty in providing a short-term outlook due to the unprecedented nature of this tragic coronavirus pandemic, investors are likely to see long-term opportunities from current equity market yields and valuations.

    Key takeaways

• Attractive equity market yields and valuations on offer should see investors return to the asset class when this stage of the cycle is better understood
• The Global Equity Income Strategy – which focuses on corporate balance sheet strength, cashflow and the long term – has increased its exposure to defensive stocks over the last year
• Diversification by geography and sector is particularly important at times of high market volatility and an active approach enables the Global Equity Income Team to take advantage of any opportunities as they arise

Transcript

It’s very difficult to give an outlook at the moment on a short-term basis because we haven’t often seen situations like these where large parts of the economy have stopped. We invest for the long term so I think when we get through this stage, which is obviously very tragic, we’ll be looking at a very, very low bond [yield] environment and we’ll be looking at very attractive equity yields and valuations, and I think you’ll see people return to equity markets, but they need to understand this stage of the cycle first.

In terms of the portfolio and positioning, I think one thing that’s worth saying is although we have higher-yielding stocks, one of the things we focus on is balance sheet strength. So, over 90%* of the portfolio are investment grade, and one of the key things that people worry about when we have this kind of volatility in markets is the effect on the debt markets, the ability of companies to finance. So that’s definitely, that’s not an area we’re worried about for the portfolio because these investment-grade companies generally would be the ones that throughout the cycle get funded.

So in terms of the portfolio and the threat of the virus this year, we have positioned the portfolio quite defensively over the last year. And we always focus on the long term, so strong balance sheets, good cash flow. And so I think the businesses we have are quite robust to take any kind of volatility in the economic cycle.

In terms of the specific threat of the virus, we have quite proactively looked for businesses over the last few months – kind of before it really built up to a head of steam – where we felt they could have direct operational impacts on the businesses through lower volumes of passengers traveling, these types of areas, and we’ve removed them from the portfolio. So, I think the most obviously impacted areas of the portfolio have been significantly reduced over the last few months.

Preparing for these types of events in markets, it’s very hard to fully anticipate everything that comes at you. For us, in our portfolio, we’ve always viewed diversification by geography and sector as one of the key abilities that help diversify clients from these types of threats and also take advantage of opportunities that they might throw up. So, in addition to looking at the sustainability of business models, strong balance sheets – those areas, the diversification by sector and region is crucial to being able to weather these types of storms.

*Source: Bloomberg as at 19 March 2020 and is subject to change