Stephen Anness, Invesco Perpetual

Global equities rebound amid capex rise

Stephen Anness, Global Equities Fund Manager at Invesco Perpetual, comments on recent movements in global equity markets…

Global equity markets generally rebounded in February, shrugging off emerging market weakness that was prevalent in January and increasing concerns over Ukraine. Both the S&P 500 and FTSE 100 posted new highs. The exception to overall improved performance was Japan, which suffered another negative month as economic numbers disappointed and concerns rose over the impact of a new consumption tax to be introduced in April.
 
Economic news flow during the course of the month remained fairly mixed. The Bank of England increased its GDP forecast to 3.4% for 2014, which would be the UK’s highest growth rate since 2007. In the US, data has been adversely affected by extreme weather conditions particularly in the retail and construction sector.
 
We have continued to observe very strong M&A activity, particularly in the US where companies announced USD336.13 billion in deals in January and February – up 31% from the same period last year. It's the largest amount spent during the first two months of the year since 2000. We are also seeing long-awaited signs that companies are beginning to invest more. This will be important if we are to see a self-sustaining economic recovery. 

Europe continued the trend of slow recovery. GDP figures for the fourth quarter of 2013 showed further improvement for many economies, with Italy exiting recession. Recent Eurozone PMI data showed a slight deceleration, though it still points to modest economic expansion.
 
We continue to believe that while the world economy continues to heal and recover from the financial crisis, it will take time and won’t be linear. Given that equity markets, in our view, have priced in a continued recovery, we should not be surprised to see volatility when economic performance or indeed individual stock performance disappoints. As fundamental stock pickers, we are mindful of the vagaries of the market and continue to focus our efforts on identifying opportunities where we are confident that companies can deliver or indeed beat market expectations.

During the month of February 2014, the Invesco Perpetual Global Opportunities Fund returned 4.12% compared to 2.85% for the MSCI AC World index and 3.33% for the IMA Global sector, which placed it within the first quartile of its peer group. Over the 12 months to the end of February 2014, the fund returned 19.33% compared with a return of 7.58% for the MSCI AC World index over the same time period, and a peer group return of 9.46%, placing it within the first quartile.

One of the main detractors of performance in January was the US retailer, JC Penney. The stock recovered strongly in February and was our best performer. The company went some way to allay concerns after a recovery in gross margins and an improvement in online sales during Q4. While we appreciate that we are only in the stabilisation phase for the business, we are confident that the new management team is on the right path with increased cost control and delivering the product set that their customers want.
 
Swiss pharmaceutical, Roche, also performed well after delivering strong earnings and sales growth in Q4. We regard the business as a very high quality compounder, aided by its focus on biologics and vaccines which are difficult to genericise. Roche also boosted its drug portfolio by introducing new breast cancer and lymphocytic leukaemia drugs in 2013. Dividends increased by 6%.
 
Netease, the Chinese internet gaming business, was the biggest detractor to performance during the month. Q4 earnings were decent, however there were some margin concerns with increased spending to promote new titles. The shares can be volatile and we expect them to bounce back with the stable performance of legacy titles, the introduction of new games and the future monetisation of mobile games.

We initiated a position in Mead Johnson, the US baby formula producer, which has significant emerging market exposure. The business is well run in our view and has many of the characteristics we look for in a strong franchise, including brand strength, pricing power and a strong and aligned management team. The long-term growth driver for the business is the increased number of women in the work place in emerging markets and the subsequent demand for a trusted alternative to breast milk. People don’t want to take any risks with baby food and there is a preference for the products of Mead (and other international producers) over cheaper domestic alternatives. This allows the company to push through real price increases, even in those economies where inflation is high. The shares have traded sideways for a couple of years, largely on the back of concerns surrounding an emerging market economic slowdown.
 
Rolls Royce was also added to the fund after it suffered its first profit warning in more than a decade in February. The share price fell more than 20% which we regarded as a significant overreaction given the quality of the franchise and the attractive long-term growth prospects for the business. The company has an enviable portfolio of products across aerospace, defence, marine and energy sectors and a strong repeatable revenue stream from the servicing of its products.
 
We exited positions in BG, Rentokil and World Acceptance. Although we were comfortable with the limited downside potential in BG, our concerns over the company’s ability to extract value from its assets, notably in Brazil, led us to sell our position. Rentokil was a special situation/turnaround story and has performed well but we now believe there are better opportunities elsewhere. Similarly, the sub-prime consumer lender, World Acceptance, had also performed well and we were mindful of the possibility of increased regulation in this sector.

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