Global equity investors should look past the headlines

And within the context of the US market, a narrow range of technology stocks drove most of the returns at the start of the year, initially a group of seven technology stocks that morphed into an even narrower number. 

Richard Scrope, who manages the VT Tyndall Global Select fund, says the record highs achieved across a wide range of markets are best not thought of at the “headline” level, due to the relatively small number of stocks behind the gains. 

Those stocks have included technology businesses in the US and those which benefit from higher rates in the UK. 

But David Harrison, manager of the Rathbone Global Sustainability fund, says a more recent feature of the markets has been a “broadening out” of equity market returns, with more stocks both in the US and globally driving returns.

Harrison says that despite the generally improved performance of non-US equities more recently, they still trade at a material discount to US peers.

Matthew McLennan, co-head of the global value team at First Eagle Investments, puts some context around the different valuation levels, with the US market trading at 20 times earnings, in contrast to the 14 times earnings in Europe and Asia, and even less in China. 

This has led to Harrison to favour UK and European equities over US equivalents. 

He also prefers many of the equity market sectors that are defensive in nature, such as pharmaceuticals and medical, as there is constant demand for those products regardless of wider economic conditions. 

Harrison also highlights the consumer staples sector, often known as 'bond proxies'.

He says these companies “tend to trade as a group” with prices falling when bond yields rise, regardless of the performances of each company, and he says this has made a number of those types of stocks very cheap. 

Bond proxy stocks are so named as the income generated in dividends is regarded as almost as secure as that on a bond. This means the share prices usually decline when bond yields rise. 

If interest rates in the US have peaked, or are cut from here, that may be a positive for the bond proxy stocks, as they may have rising income streams when bond yields decline.