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Global Equity Income Portfolio: September 2020


  • Global equity markets continued to climb in August with the global index rising 6.2% and the high dividend index returning 3.6%. Led by significant returns from just a handful of stocks, the S&P 500 has now reached new highs. Without the returns provided by only five companies - including Microsoft, which the Global Equity Income Portfolio holds - the S&P 500 would be in negative territory for the year.
  • The Global Equity Income Portfolio returned 2.9% over the month.
  • Trading activity was limited.

Market update

Microsoft and BAE Systems provided double-digit returns. At the end of July, BAE reported results ahead of their expectations provided in the pre-close statement. They also resumed their dividend and provided a reassuring outlook. 

Diageo was the main disappointment, falling 7%. The firm reported subdued results largely due to poor on-trade sales in Europe and Africa as well as a reduction in volumes from global travel. While some weakness had been anticipated these results were worse than had been expected. Demand is, however, expected to recover and a restocking event may provide a short-term tail wind at some stage. The dividend was maintained.

When the stock market returns close to annual return expectations in a one-month period that some tempering of future return expectations is usually required. Towards the end of the month was the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole. At this meeting US Federal Reserve chairman Jerome Powell said that the Fed’s decisions will from now on by guided by the “shortfall of employment from its maximum level” and no longer by deviations either side of full employment. He also outlined a move towards “average inflation targeting”. Overall, the implication is that monetary policy is likely to remain expansionary further into the future than the stock market had previously anticipated. This is likely to mean that asset prices continue to rise. Given the lack of available returns from other asset classes equities seem likely to continue to benefit.

Some element of inflation was previously thought likely to lead to higher interest rates and hence a re-evaluation of the market of traditional growth and value stocks. This now no longer looks likely in the medium term. It seems likely that this results in the continuation of the recent environment which is more favourable for stocks providing future earnings growth than traditional value-based investments. Long term this looks likely to lead to asset bubbles when market prices in some sectors increase over time and trade at far higher levels than fundamentals would suggest appropriate.  Though everything is easy in hindsight, bubble spotting is notoriously difficult and claims of finding them are usually made by those wrongly positioned, at least in the short term.

The Global Equity Income strategy continues to seek shares of companies offering above-average dividend yields.