Give Your Portfolio
a Genuinely Long-Term Focus

It’s Zehrid Osmani, Head of Global, US and European Long Term Unconstrained, and manager of Global Portfolio Trust at Martin Currie.

We have structured this podcast on 2 parts:

 
1.  an update on our market thoughts - focusing on earnings season we have been going through and update on earnings risks we foresee
2. an update on our portfolios - specifically how we deliver conviction exposures  

As a reminder, we manage high conviction best ideas portfolios focusing on long term sustainable quality growth stocks, which have low disruption risk, high barriers to entry, strong pricing power, attractive growth and returns profiles, good ESG profile and attractive valuations. We offer our investors Global, European, International and US versions of our Long-Term Unconstrained funds, as well as Global Portfolio Trust being one of our Global offerings.

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Starting with an update on our thoughts on the market: and to reiterate again, these market comments are aimed to give our listeners food for thought. We are long-term investors, we manage assets with a long horizon perspective, and therefore some of the market thoughts do not impact our long-term thinking.

There are a few things worth highlighting about the markets at the moment:

Unemployment rates are sky-rocketing, and labour market has deteriorated significantly and very rapidly we need to therefore watch the potential negative feedback loop on the economic activity of such deterioration, if we don’t get back to previous levels of employment once economies come out of lock-down fully

That risk is significant in our view, given that the shape of both the supply and demand is unlikely to come back to normal post lock-downs as a result of enforced social distancing.

Economic leading indicators are likely to rebound over the next 1-3 months in our view.

It is somewhat mechanical, given how sharp a deterioration we have seen as lockdowns got implemented across the globe and given the fact that the survey is assessing improvement/deterioration compared to the previously carried survey.

It might have the potential of sending the market into hope or euphoria about a rapid recovery in economic activity coming up.

But that recovery could be more muted than what the PMI headline figures might imply.

Shape of recovery will still be an important talking point for the months and year to come, so we will need to remain vigilant as the situation evolves, and continue to reassess our core assumptions.

As a reminder, we have a core top-down assumption of a recovery that is likely to be gradual, without going back to previous levels of activity until 2022.

Worth moving onto the results season we have been going through. It has been a very busy results season given the significant recessionary environment we are going through as a result of the pandemic crisis. It has certainly been the busiest results season in my close to 23 years of experience of financial markets.

Earnings downgrades have been significant since the start of the year, as we flagged in our last podcast - to the tune of 25%+ downgrades with earnings declines now standing at >20% year on year for the US and Europe, and close to -20% for MSCI World

Earnings seasons have shown confirmation of the magnitude of slow down, and we are forecasting Q2 to show an even more severe slow down.

 
Earnings surprises for Q1 have been negative, despite the sizeably reduced estimates ahead of reporting, with a 1% negative surprise in the US and a 3% negative surprise in Europe

We continue to see our core scenario for 2020 as accurate based on what we have seen from this results season.

 Our core assumptions, which we detailed in the last podcast, are implying a year-on-year earnings decline of circa 33% globally in 2020, so we are still expecting more earnings downgrades to come  

The market reaction to the earnings has clearly been positive, with a shift from the fear we saw in March, to a willingness to look through to recovery rather than to the current profit warnings and downgrades that we are going through.

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Shifting to our portfolios and moving to the second section of our podcast, to discuss how we deliver high conviction funds. As a reminder, we manage high conviction best ideas portfolios focusing on long-term sustainable quality growth stocks, which have low disruption risk, high barriers to entry, strong pricing power, attractive growth and returns profiles, good ESG profile and attractive valuations. We offer our investors Global, European, International and US versions of our Long-Term Unconstrained funds, as well as Global Portfolio Trust being one of our global offerings.

Our portfolios focus on best ideas, delivered in a high conviction way. We estimate conviction levels on any stock we hold through our proprietary analytical framework and ensure that all of our holdings express our strong convictions on business model, competitive positioning, structural growth outlook, returns profile and potential for further improvements. And we make sure we rapidly act and attend urgently to stocks where our conviction is weakening, in order to understand the reasons for that, and assess how we can rebuild conviction. If at the end of that process, we cannot rebuild conviction in a name we take action and exit. And we recycle that exposure into our high conviction names, which we size properly to capture the alpha we expect from such convictions.

As I always say: in a high-conviction portfolio, there is no room for low conviction.

Also, focusing on delivering solely high-conviction stocks to our investors means that we have to make tough choices: when a new stock comes through our fundamental research work and is high conviction, we take the approach that in order to buy it, we need to make a decision on which stock to exit and replace it with. As all our stocks are typically high conviction, it makes for a tough choice at times. We generally assess upside to price target, conviction levels, risk profiles and impact any of these stocks have on the overall portfolio risk exposures and shape. It ensures that we stay disciplined and only buy new stocks based on a high threshold of selection criteria.

We also typically end up with a list of stocks that are away from the large blue-chip mega-cap companies, which makes our funds somewhat differentiated in terms of holdings list.

In the next podcast, we will focus on the topics of market valuations, which we didn’t get the chance to discuss given the importance of tackling the earnings season in this podcast. We will also zoom in on our proprietary ESG risk assessments as part of our investment process.

We would like to finish this podcast with what has become a customary quote from us to capture the mood of the markets and of the podcast we have recorded: “Believing in an investment opportunity comes from having conviction about the investment case”

It’s Zehrid Osmani, Head of Global, US and European Long-Term Unconstrained, and manager of Global Portfolio Trust at Martin Currie.

Wishing our listeners a good day.
Stay safe, keep the spirits up and stay optimistic.