The Quarter in Review
Global equity markets had a positive quarter with the US leading, followed by non-US developed and emerging markets. The S&P 500 Index had its best first-half performance since 1997, overcoming rising trade rhetoric between the U.S. and china. On the monetary policy front, major global developed world central banks left interest rates unchanged during Q2 as expected. The Fed continue to indicate they will remain accommodative if economic conditions soften and the ongoing trade negotiations take longer than expected to resolve.
In a low growth environment the growth oriented stocks continue to perform strongly led by the information technology sector. The major laggards were the energy and health care sectors. Oil prices fell during the quarter on the back of an oversupplied market. Healthcare stocks continued to be pressured as there is increasingly negative US political rhetoric around pharmaceutical pricing.
Source: Insync Funds Management as at 30/6/19 – Past Performance is not a reliable indicator of future performance. *Represents net of fees and costs performance, assumes all distributions reinvested. ^Any Returns prior to July 2018 represent the underlying Insync Global portfolio (including cash) inclusive of a 0.98% p.a. MER. ~ MSCI All Country World ex-Australia Net Total Return Index in Australian Dollars. # Inception date 9/10/2009
For the quarter the Insync Global Capital Aware fund, and the Insync Global Quality fund, outperformed the MSCI ACWI (ex AUS) benchmark and remains well ahead over the 12 month period. Pleasingly, almost all the stocks delivered positive performance during the quarter with only one stock which was slightly negative. Leading contributors to the portfolio were Booking Holdings, Visa, Zoetis, Apple and Facebook. The detractors include Ross Stores, London Stock Exchange, PayPal Holdings, Reed Elsevier, and Amadeus.
Our Outlook for the Next 6 months
Whilst there continues to be plenty of debate about the valuations of global equity markets, equities are significantly cheaper than bonds as can be seen in the chart below which compares the earnings yield of the S&P 500 versus the 10 year US treasury yield.
Strategas Research have suggested that the forward returns, based on history, are double digits when the spread is as wide as shown in the chart.
In terms of investment style there has also been an intense debate on the persistent outperformance of growth oriented stocks versus value oriented stocks over the past 10 years. Simplistically, many investors and researchers categorise the stocks based on simple P/E ratios with value oriented companies trading at below market average P/E ratios and growth stocks trading on above market averages. We strongly take the view that one of the key drivers behind the outperformance of growth companies has been the general business environment which has seen economic growth and inflation rates post the GFC at levels below pre-GFC. This is a supportive environment for long duration assets. The Fed chose the 2% target in 2012. Since then, despite aggressive quantitative easing, inflation has not risen to 2% for any great length of time. The market’s expectations of future inflation are also stuck below 2%.
We do not see the environment changing any time soon reflected in central banks seeking to aggressively lower interest rates to try and deliver higher levels of growth and inflation. In this environment Insync’s high quality equity strategy focused on investing in sustainable growth and highly profitable businesses with a disciplined valuation framework will be one of the winning equity strategies, whilst many other investment styles will struggle and likely disappoint.
Disclaimer EQT Responsible Entity Services Limited (“EQT”) (ABN 94 101 103 011), AFSL 223271, is the Responsible Entity for the Insync Global Capital Aware Fund . EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.