PARTNER INSIGHT: Fidelity portfolio manager Jeremy Podger reviews three key areas that have driven global equities in recent times. He assesses whether these trends may now have run their course and how he is positioning for what happens next.
Stockmarkets are in a state of constant flux but there are currents that can persist over long periods. Think of the fund manager as navigating a river which is constantly twisting and turning, sometimes calm and sometimes perilously turbulent. At times, one can be positioned in the sweet spot, finding oneself speeding ahead for a while but then, as the river changes course, left behind in an eddying backwater. We see this in the measurement of ‘momentum' effects in markets.
As long as ‘momentum' is working, stocks that have performed well in earlier periods have a tendency to outperform subsequently. This appears to have been the case around the world for a very long time (with the notable exception of Japan).
However, the measurement of the momentum effect really only captures shorter-term effects. It says little about persistent trends since today's momentum stocks may be quite different from those of a year ago. So trying to follow a purely momentum-driven strategy would involve a frantic level of portfolio turnover. Occasionally there is a sharp anti-momentum move which will catch out the trader on the way in and the way out and cause huge short-term losses.
It is far better then to try to tap into more persistent effects - long-term momentum, if you like. Fortunately, at least with the great benefit of hindsight, trends often mirror fundamental earnings power (relative to market averages) and are initially supported - and eventually checked by - relative valuations. Such trends seldom move in a straight line but a manager that sticks with a multi-year theme through thick and thin can appear to be inspired.
Post-crisis themes
There are many good examples of historic mega-trends that have propelled the careers of fund managers. Think of the heroes that focused on emerging markets between the end of 2001 and 2010. The MSCI Emerging Markets index returned over 200% over those nine years against only a small rise in developed markets - but over the next five years it fell by 30% as the developed world steadily appreciated. Or, in the middle of that period, the fad for basic materials that fuelled the fantastic growth of China causing, for example, Rio Tinto (thanks to its leading position in iron ore) to quintuple before giving it all back in the second half of 2008.
Therefore, we need to to ask about recent areas of leadership - have we seen the best of these trends? The three clearest trends worth talking about (and they are to some extent overlapping) are quality, technology and growth. There are some clear signs that these trends are changing somewhat and may even reverse over the medium term.
To read the full article, and understand the changing dynamics of key themes, click here to read the full Spotlight Global Equities guide.
