Global Equities Market Views - December 2023
Bell Asset Management
Specialist global equities manager with a Quality At Reasonable Price (QARP) approach.
Global Market Commentary
At the risk of stating the obvious, 2023 was a year of mixed performance in global equities, where a handful of well-known names dominated index returns. More specifically, six names, Apple, Microsoft, Amazon.com, NVIDIA, Alphabet and Meta which represented over 16% of the MSCI World Index, accounted for approximately 40% of the index return. Furthermore, only 34% of the index constituents actually outperformed the broader index over the year. When it comes to the MSCI World Quality Index, only 25% of the index constituents outperformed the Quality Index and 34% outperformed the World Index.
At a sector level we also saw material performance differentials whereby the Information Technology and Communication Services sectors materially outperformed while Utilities, Consumer Staples, Energy, Health Care and Real Estate materially lagged. The performance differentials between Large & SMID Cap equities were also meaningful, as the MSCI SMID Cap Index lagged the MSCI Large Cap Index by nearly 10%.
Arguably the biggest anomaly in 2023 was at a ‘Style’ level. While the MSCI World Index delivered a return of 24% in USD terms, the various style indices showed material divergence with the MSCI World Value Index only up 12% versus a 37% return for the MSCI World Growth Index. The MSCI World Quality Index also generated a strong 33% return for the year, very similar to the Growth index, highlighting the big overlap between these two styles based on MSCI’s definition of Quality. To that end, within the top 10 constituents of both indices there were 7 common names as at December 2023. Our definition and implementation of Quality investing differs slightly from the perspective of being more balanced across the ‘Value’ and ‘Growth’ styles.
When we look at ‘equally weighted’ style factors, the outcomes are very different. According to Bloomberg’s style definitions, some of the worst ‘factors’ in 2023 were a) Low Volatility, b) Quality and c) ESG Disclosure Score, all of which materially lagged the broader index. Against a backdrop of higher inflation and interest rates, the poor performance of Quality and Low Volatility at the expense of expensive Growth seemed somewhat counter-intuitive.
As far as the macro environment is concerned, despite the numerous ‘recession cries’ from market pundits in January 2023, global economies have for the most part held up quite well. As we look into 2024, the steady deceleration in economic growth and inflation is looking more and more like a soft landing, which would likely be well received by markets. From our perspective, we are in the camp of moderately declining inflation and possibly 1-2 moderate rate cuts in the second half of the year.
Market Outlook
As we start the new year, we are optimistic about markets and the opportunity set that we have available to us. As far as markets are concerned, we feel that equities, for the most part are quite attractively valued. The aforementioned equally weighted MSCI World Index trades on a forward P/E of 15.2x which is moderately below the 10-year average of 16.2x and 2 points lower than the MSCI World Index (17.4x), the main difference being the magnificent seven. The MSCI World SMID Cap Index continues to look attractively priced, trading at 16x forward P/E which remains at a material discount to long term averages, especially on a relative basis versus the large cap growth segment of the market.
In other words, we feel that there is a reasonable valuation underpinning to equities more generally and if we do see moderating interest rates in the back half of 2024, we wouldn’t be surprised to see some multiple expansion. We would also note that we see numerous opportunities in the market where the valuations are depressed and should mean revert in 2024 i.e. SMID caps, Consumer Staples, mispriced Quality etc.
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As far as our positioning is concerned, we continue to believe that investing in a portfolio of high-quality stocks trading at a reasonable price is the best strategy to generate outperformance over the long term and remain confident in how the portfolio is positioned looking forward.
While 2023 was a somewhat frustrating year for us from a relative perspective, we feel the set-up for 2024 is very positive for the SMID Cap cohort of the market and our ‘Quality at a Reasonable Price’ strategy in general. It is also somewhat analogous to 2016 which was also a tough year for broad-based quality, as the Brexit vote and Donald Trump’s election victory triggered numerous anomalies in markets. At that point we stuck to our process, opportunistically added mispriced quality exposure and in doing so our SMID Cap and Core strategies subsequently outperformed over the following five-year period. While the background music is a little different now, we are sticking to our process and have been able to opportunistically improve our quality exposure in recent months. With that in mind, we are confident that 2024 & 2025 will be positive years for our global strategies.
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Important Information
Note: For Advisers & Wholesale Investors only
Bell Asset Management Limited (BAM) ABN 84 092 278 647, AFSL 231091 is the responsible entity for the Bell Global Equities Fund, Bell Global Sustainable Fund and the Bell Global Emerging Companies Fund (the Funds). Distribution of the Funds is undertaken by Channel Capital Pty Ltd ACN 162 591 568 AR No. 001274413 (Channel). Neither BAM nor Channel warrant the accuracy, reliability or completeness of the information. This report has been prepared by BAM for information purposes only and does not take into consideration the investment objectives, financial circumstances or needs of any particular recipient – it contains general information only.?Before making any decision in relation to the Funds, you should consider your needs and objectives, consult with a licensed financial adviser and obtain a copy of the product disclosure statement, which is available by calling BAM on 1300 305 476 or visiting www.bellasset.com.au. No representation or warranty, express or implied, is made as to the accuracy, completeness or reasonableness of any assumption contained in this report. Past performance is not necessarily indicative of expected future performance.?BAM has issued a Target Market Determination (TMD) for each Fund discussed in this presentation and each Fund’s TMD is available at www.bellasset.com.au.