March has been something of a curate’s egg for investors with an increasing list of worries to focus on – whether it be Ukraine and its potential escalation, inflation, China’s covid-related lockdowns, fears over errors by policy-makers, and the risks of recession whether caused by energy costs, broader inflation or over-enthusiastic monetary tightening. The correction in the US bond market has been one of the sharpest in many decades, from a yield of 1.7% on the US 10 year Treasury on 1st March to 2.5% on the 28th, and now to 2.8% today. This has reflected a swift change in mood from safe-haven status to one with greater emphasis on the Fed’s US updated GDP forecast of 2.8% in 2022 (still well above the 20 year trend rate) and the prospect of ‘higher for longer’ inflation and the associated policy response.
At the same time, it is clear that many companies and industries are benefiting from a cyclical recovery in demand post-Covid and that for those with a global footprint, a manageable exposure to direct energy costs and (critically) with pricing power, the outlook for their profits and cash flows is still robust. This position across many global companies, with a particular boost for energy and mining stocks, and a recognition that equities are the largest and best asset class through which to gain insulation from inflation, combined to drive the MSCI World index up by 3% in USD in March and by over 10% from its low point in February.
Our own equity investments are focused in companies with minimal revenues in Russia and Ukraine, and powerful competitive positions in attractive growth industries. Public statements from these companies have naturally turned more cautious, a message that will be emphasized in the forthcoming Q1 results season, but we still expect good progress in revenues and earnings in 2022.
Last week our World Stars Global Equity Fund passed its three year anniversary as a UCITS fund and the strategy will have a ten year track record this October. These important milestones reflect a continuation of the Stern family’s focus on investing in leading global stocks for over 60 years.
Our Investment Insight this month is focused on equity returns since 1928 using the Returns Triangle from Deutsches Aktieninstitut, which was originally based on the DAX index (top 40 stocks listed in Frankfurt), and which we have converted to show annualised equity returns based on the S&P 500 index. The analysis underlines the appeal of large-cap equities in a leading developed market as a powerful source of real returns for long-term investors.
Taking the entire duration since 1928, sub-divided into shorter investment periods, the average return over 5/10/15 and 20 years has been in the range of 10.2-10.8% CAGR in USD, including dividends and before costs. In a more recent example, an investor who purchased in January 2008 and endured a 37% fall in that year, would have received a 9.1% CAGR return by holding onto those shares until December 2019, and 11% CAGR by December 2021. In other words, the longer you hold on to your equity investments, the more likely that poor performing years will be significantly offset by good years.
It is hard not to worry about the greatest current uncertainties, which we would class as a substantial escalation in Ukraine or significant errors by policymakers. But for investors with a long-time time horizon and an eye for high-quality investments listed on leading stock exchanges we believe this is a time to take advantage of volatility and the opportunities it presents.