Global Equity Income Portfolio: July 2020

Summary

  • The global equity market continued its rebound in June, however the Global Equity Income portfolio had a less positive month, declining 0.3%
  • This brings the year-to-date performance of the Global Equity Income portfolio to -10.7%  which, while disappointing, compares favourably to the Global high dividend equity index return of minus 16.6%
  • Healthcare holdings performed poorly during the month, likely due to the increased risk of negative legislation in the USA should the Democratic Party gain a land slide win in the up-coming election.

Market update

Global equities continued to rebound in June and the MSCI World High Dividend Yield Index returning 2.1%. 

The technology sector is very much in favour at present with the COVID-19 lockdown efforts accelerating adoption. Valuations of certain stocks in the sector seem somewhat stretched however, meaning that dividend yields are low. Microsoft was the portfolio’s best performer during the month and provided a double-digit return. Microsoft continues to command an entrenched leadership position and is seeing tremendous growth in cloud services. However, our team is aware that the dividend yield on the stock has now fallen to below 1%. We will keep an eye on this as the portfolio has an income focused mandate.

Trading activity in the portfolio was elevated. The holdings in AstraZeneca and Nestlé were both sold. Both stocks have performed well reflecting the underlying strengths of both businesses and dependable growth. However, their available dividend yields have become depressed and a reduction in weighting to the healthcare sector was thought prudent.

Three new positions were established, The Coca-Cola company, DBS Bank and JP Morgan.

Coca-Cola continues to move away from high sugar and sparkling drinks into other growth areas within the beverage industry. Modest volume growth has been masked in the historic financials due to refranchising and US$ appreciation. Looking forward, a little US$ depreciation is likely alongside continued modest volume growth, we believe the company’s financial results will improve. Meanwhile Coca-Cola’s shares provide a 3.6% dividend yield.

DBS Bank consistently generates returns ahead of its cost of capital. It achieves this by having highly efficient systems and processes as the bank continues to invest in digital capabilities. We believe that the attractive dividend yield of 5.7% should be secure while the bank’s exposures to some economies with attractive demographics should also enable some element of capital growth.

JP Morgan is the largest bank holding company in the US, and offers high levels of return on equity and has a relatively low cost to income ratio. The firm recently performed well in the US banking stress tests. This should see the share’s dividend yield of 3.8% remain secure. 

Explanations of the continued rally in the equity markets include governments ending lockdowns, hopes of a COVID-19 vaccine being developed in the near future, and the self-perpetuating nature of bull markets with those on the side lines jumping in over “fear of missing out”. The continued rise of coronavirus cases in the United States (US) suggests that ending of their lockdowns might have happened too early, despite testing and tracking tools being available. We remain hopeful of successful pivotal trials of a coronavirus vaccine soon. The United Kingdom (UK) Oxford group trial, being run by AstraZeneca for instance, should see results by the end of August. Governments and charitable bodies have taken the unusual step of mass manufacturing the vaccine, and several other potential vaccines, in advance of definitive clinical evidence. This could result in vaccination programs beginning as early as the end of September.

The biggest driver of markets though, is likely the ongoing easing of money supply from the central banks who continue to pump newly created currency into the world while buying up assets. It appears this “unconventional policy” is fast becoming what appears to be the new normal. While we believe preventing problems of liquidity is justifiable, trying to prevent solvency issues sets up continued dependency of certain industries and economies on financial stimulus. 

One significant consequence of this monetary policy on markets is the substantial reduction in the expected returns available from non-equity asset classes. This forces investors looking for return seeking assets, to invest into equities. In their search for greater returns on investment, a recent change in the US Federal Reserve’s (the FED’s) mandate may allow the Fed to start purchasing equities, this would be in line with policies from other central banks like the Bank of Japan (BoJ) and Swiss Central Bank, who already have a policy to purchase equities. It would be an extraordinary move by the FED, controllers of the world’s reserve currency, and it is hard to think how such a move would assist underlying economies. These are however extraordinary times.