Market Comment for October 2018
The Global Trend Funds are equity funds and therefore not immune to the vagaries of market sentiment. However, the underlying fundamentals of portfolio holdings remain strong as the Funds invest in structural trends and growth that is not defined by economic cycles but long term structural changes (that will persist even as interest rates and trade tensions rise). The recent increase in volatility is starting to generate more buying opportunities of companies with attractive growth prospects.
Economic expansions do not die of “old age”
The IMF cut its global growth forecasts last week to 3.7% for this year (from 3.9% - see table). The trade disputes and capital outflows from emerging markets were mentioned as the main reasons for the downgrades that are not concentrated in a particular region (Europe and Latin America were the most noteworthy downgrades).
The volatility in equity markets might have given the impression that investors foresaw an imminent global economic slow-down. The broad pullback was mainly driven by macro concerns – rate increases and bond sell off, trade-war and its effect on global growth forecasts, and Italian budget concerns. According to CNBC the average US rate on the 30-year fixed mortgage loan rose above 5% after dropping below 4% a year ago.
While recent market declines have been broad based across multiple sectors one could observe that certain areas, such as technology, showed signs of “over-shooting” as investors rotated out of those sectors. In the Ecommerce portfolio, for instance, equity holdings are characterized by strong fundamentals (weighted average the Bloomberg Consensus 1 year earnings growth of +16.2%), while valuation is cheap by historic standards with a forward free cash flow yield of 4.25%. We have yet to observe anything uniquely sector specific weakening in relation to the key growth sectors included in the portfolios of the Dominion Funds.
Underperformance of growth: A buying opportunity?
As investors navigate a path through this turbulent period for growth stocks, it is important to keep in mind that the flipside of growth stocks is that the multi-year discounting of (free) cash flows can lead to additional volatility when cash flows become less visible. Growth investors can be reassured that these periods, although unpleasant, are transitory and long term holding strategies (of credible growth stocks) ultimately generate positive performances. Growth investors are therefore well advised to critically monitor the cash generating capacities of growth companies (which can vary in time as companies advance from early growth- to high growth -to maturity). Recent earnings trends of stocks included in the Dominion funds have not required major portfolio adjustments or modifications of overall investment strategies.
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