8 min read | Narrow market leadership by highly priced US growth stocks has been a thorn in our side, and we have written extensively about the combination of factors that would cause markets to broaden out. Despite the most significant of these conditions being well underway (rising rates and inflation uncertainty), the lack of breadth in markets has returned to historically extreme levels, with enthusiasm surrounding generative AI contributing to the surge. AI is a significant technological innovation, but we believe it is being greatly overhyped and overestimated in the short term, as is typically the case with new technologies. Stock prices for leading “AI stories” discount growth rates that will be difficult to achieve, thus impairing their underlying margins of safety. Although there are pockets of excess and exuberance, 68% of global stocks underperformed the MSCI World Index in the second quarter – and 44% actually declined – leaving many companies offering very compelling risk/return propositions. We see opportunity among companies embracing AI in their operations to enhance their business quality and efficiency, most notably in health care, non-life insurance, exchanges, global consumer franchises, industrials, and business services, to name a few.
10 min read | Global equities delivered strong gains during the first quarter as investors shrugged off two of the three largest bank failures in US history and the collapse of once venerable Credit Suisse. The proximate cause for the rally is a belief that inflation risk is vanquished, interest rates have peaked, years of extraordinary financial stimulus can be normalized painlessly, and the global economy will not experience a downturn. This implies a tremendous amount of confidence in policymakers.
10 min read | Global markets recovered strongly during the fourth quarter, aided by falling inflation expectations, optimism that the US Federal Reserve would move away from aggressive policy tightening, an improved energy outlook in Europe, and President Xi’s unexpected decision to unwind zero-COVID policies. The rally was certainly welcomed, but 2022 was the most challenging year since the global financial crisis. According to Michael Howell of CrossBorder Capital, global investors lost US$23T of wealth in housing and financial assets in 2022, equivalent to 22% of global GDP and greater than the US$18T of losses suffered in the 2008 financial crisis. Commodities were the only refuge, as long-term bonds had their worst year since the 18th century (according to the Financial Times) and equities fell 18.1% in 2022 (MSCI World Index) even after rising 9.8% in the fourth quarter, as measured in US dollars.
The downturn in markets continued during the third quarter as concerns over tightening monetary policy, inflationary pressures, weakening economic growth, and geopolitical risks intensified. Despite strong gains early in the quarter, the MSCI World Index declined 6.2% (as measured in US dollars), ending approximately 22% below peak levels reached in September 2021. The Altrinsic Global Equity portfolio declined 8.2% over the same period.
Greed has given way to fear. We have not reached a stage of extreme capitulation, liquidity unwinds, or distress, but fear emanating from headlines and market declines is reflected in poor investor sentiment and the growing presence of value.
Global equities delivered their worst quarterly performance since the European sovereign debt crisis as uncertainty stemming from inflationary concerns, tightening central bank policies, and rising recession risk weighed on markets. The Altrinsic Global Equity portfolio declined 10.9% during the second quarter, outperforming the MSCI World Index’s 16.2% decline, as measured in US dollars. Outperformance was derived from all major industry exposures except real estate, materials, and utilities. We take no consolation in our relative outperformance during this painful drawdown. Near-term macro data and corporate earnings will likely be disappointing, but we are confident in our positioning and encouraged by the investment propositions offered by a growing number of companies with strong long-term fundamentals and attractive valuations.
The Altrinsic Global Equity portfolio declined 0.1% during the first quarter, outperforming the MSCI World Index’s 5.2% decline, as measured in US dollars. Just as most nations began lifting COVID-related restrictions and returning to normal, tensions intensified amidst surging inflationary pressures, tightening policy measures in the US, lockdowns in China, and Russia's invasion of Ukraine.
Beginning with the January insurrection at the US Capitol and ending with the rapidly spreading Omicron COVID-19 variant, 2021 provided much for markets to digest. Nonetheless, equities continued their rise with support from re-opening economies, strong corporate earnings growth, and stimulative monetary and fiscal policies. This strength continued during the fourth quarter led by US equities (+10.0%) and “growth” stocks, while non-US (+2.7%) and emerging markets (-1.3%) lagged.
The Altrinsic Global Equity portfolio declined 0.7% during the quarter, compared with the 0.0% return of the MSCI World Index and the 1.1% decline of the MSCI All Country World Index, as measured in US dollars. Strong performance by our financials holdings was offset by weakness among health care and communications investments that lagged due to uncertainties stemming from COVID-19 and China.
Equity markets delivered strong gains in the second quarter, aided by continued policy stimulus, robust economic and corporate earnings growth, positive sentiment stemming from fewer global COVID-19 cases, and a supportive interest rate environment. Large cap “new economy” stocks led the markets in Q2 given the supportive interest rate environment, while health care stocks advanced on softening political rhetoric and positive new drug discoveries.
Equity returns were strong in the first quarter, supported by positive economic and corporate earnings revisions that offset the negative impact of rising interest rates. The Altrinsic Global Equity portfolio gained 6.1%, as measured in US dollars, compared with the MSCI World Index’s 4.9%. The most significant market developments were a continued rotation into cyclical and leveraged equities, a surge in commodity prices (S&P GSCI +14.2%), increased inflation expectations, and negative returns for bonds (FTSE WGBI -3.2%).