Wealth Strategies

Explaining Equity Markets Through "Excess Liquidity" Spectacles

Tom Burroughes, Group Editor, 20 July 2020

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This publication recently talked to a fund manager who argues that the sheer scale of central bank liquidity assistance to the financial markets cannot be ignored when judging how to set asset allocation.

There is a force driving moves in the global equity market, and that force is “excess liquidity”. 

That is the view of Ian Beattie, co-chief investment officer of NS Partners (his firm has partnered with Nedgroup Investments for more than a year). “Excess liquidity” relates to the quantity of money and figuring out how that relates to the overall size of an economy and market, then trying to measure whether that will boost assets such as equities or real estate. The greater the “excess liquidity”, the greater the potential lift the market will get.

Central banks have, since the COVID-19 pandemic erupted, pumped trillions of dollars and currency equivalents into the financial system in an attempt to prevent markets crashing. An ever-present question is when and how policymakers judge that the taps can be turned off – and even put into reverse. The rise has been large; Beattie cites figures showing that in the Group of Seven major industrialised nations, broad money supply growth rose by 13 per cent in April, the fastest gain since 1976. (The mid-1970s was a time of “stagflation” in some countries - high unemployment and rising inflation, a combination that had economists tearing up their Keynesian textbooks.)

Beattie brings such conceptual tools to the job of investing in sectors such as emerging market equities. Broad forces can still overcome more idiosyncratic, company-specific qualities, even though the latter are important. The Nedgroup Investments Global Emerging Markets Equity Fund, which he runs, marked its first anniversary in June. 

“Country selection in emerging markets will tend to crowd out the stock selection you do,” he told this publication. “It’s no good having the best stock in Argentina last year or missing China this year.”

Emerging markets provide a relatively cheap way to obtain an inflation hedge, given the vast amounts of central bank QE in recent times, he said.

Beattie has been running money in East Asia and the broader emerging markets for 29 years. He began his career at Royal Insurance Asset Management as an Asian fund manager in the Far East team where he soon became responsible for a variety of Far East client portfolios. He joined what is now NS Partners in 1996. He assumed responsibility for all Asian equity investments shortly thereafter and took on the emerging markets area in late 1998. 

His fund is bullish on China (with its initially draconian response to the pandemic) and its relatively quick emergence from the crisis. It cites several factors for this sentiment, including factories being back up and running, restaurants opening, and China’s outperformance of the MSCI EM benchmark which has been nearing 20 per cent since March, in contrast with other emerging market countries such as Brazil, lagging by roughly 40 per cent. Russia and India have also underperformed. However, the fund is now also considering allocating more to cyclical markets which underperformed at the start of the crisis.

He says his stock selection has been very positive in recent weeks, with highlights on the country selection as well, such as emerging Asia - China, for example. India and Thailand were negative, however.

In Emerging markets in Europe, the Middle East and Africa, the fund logged gains from Poland. Country selection has been positive in Latin America and South Africa as well as cash.

The fund remains overweight in IT, internet, consumer discretionary and staples and underweight in materials, telecom, autos and energy, but plans to add to this second group with high quality stocks as recoveries begin, Beattie said. The leverage factor remains negative, meaning that the portfolio companies have less debt than the index as a whole.

Choosing investments is about having a robust approach to stock-picking, quality of firms, and firms with a competitive advantage, he told this publication in a recent call. “In the right stock, in the right market and at the right time,” is his motto.

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