Sensitivity of selected global equity funds to macro factors
The chart data shows the sensitivity of the five largest global equity funds to changes in macroeconomic factors: global default spreads; global interest rates; US Dollar Trade Weighted Index and global inflation. IPE and PureGroup selected the largest domestic and cross-border funds registered for sale in the UK, in terms of assets, from the Morningstar database.
The selected funds are:
• MFS Meridian Funds Global Equity
• Pictet Global Megatrend Selection
• Carnegie Worldwide
• Investec Global Strategy – Global Franchise
• BNY Mellon Long Term Global Equity
The higher the sensitivity of each fund to the particular macro factor, the higher the probability that performance will respond to changes in that factor. The graphs show the sensitivity of the funds to the factors, while the bar charts below show the monthly year-on-year change of the factors over the past five years. The data was analysed using PureGroup’s Forward Perspective Model, a macroeconomic factor model built for the investment industry, covering open-ended, closed-end and exchange-traded products.
The backdrop to global economic markets is one of continued uncertainty, with several mixed and at times conflicting messages across standard indicators. As outlined by the International Monetary Fund’s World Economic Outlook update in July, growth in most advanced economies remained lacklustre, although the outlook for some large emerging markets is improving.
Global default spreads
The default spread is the difference in yield between BBB and AAA global corporate bonds. In emerging markets, corporates borrowed heavily in dollars to take advantage of low US rates. Conversely, these companies may struggle to repay their debts when the Federal Reserve raises rates. In the US, the outlook for some corporate bonds is unfavourable. European default spreads may be supported by the European Central Bank’s bond-buying programme but are likely to widen as Brexit raises questions over the bloc’s further integration. While more likely to be range-bound in the short term, looking further there is potential for default spreads to widen, if this happens, then it is likely to be more favourable for the Carnegie and Investec funds, as they have a positive sensitivity to this factor. The fund most likely to be affected in this scenario is the MFS Meridian Fund.
Global interest rates
In the absence of higher growth, interest rates may remain at existing levels or even decline in Japan and in the euro-zone. The euro-zone’s problems may be compounded by political uncertainties in the aftermath of the UK’s decision to leave the European Union. This could result in investors questioning the durability of European integration, which might adversely affect confidence and economic conditions on the continent. In contrast, the relatively healthier conditions in the US economy may enable the Fed to raise interest rates gradually. Given this backdrop, most funds will see little impact to a positive contribution to performance, with the exception of the Carnegie fund.
USD trade weighted index
Higher US interest rates may lead to the dollar strengthening against the currencies of countries whose central banks are not interest rates. The dollar might also rise because of sentiment-driven demand. During periods of market turbulence, investors typically rush to invest in quality assets such as US Treasury bills. These risk-off moves generally push up the dollar and pull down emerging market currencies. Strengthening dollar currency markets would produce a positive contribution to BNY Mellon’s performance, but generate headwinds to both the Carnegie and Investec funds, with the latter being the most affected on a relative basis.
A sustained depreciation in emerging market currencies may increase inflation in these countries, although large commodity importers may escape this fate. Subdued oil prices may also cap inflation rates in advanced economies.
Overall, the outlook for global inflation is ambiguous. In the absence of a spike in inflation, interest rates may remain at current levels.
This also means that term spreads are unlikely to expand or contract sharply, as these spreads are strongly influenced by growth and interest rates.
The historical trend has been to an overall deflationary cycle globally, which has been to the benefit of the Pictet fund, although over the past 12 months this has moved to a positive position. However, if we see this move to an inflationary cycle, this would most notably benefit the MFS fund on a relative basis than the BNY and Carnegie funds.
Patrick Murphy, director, PureGroup puregroup.io/academic-research