October Market Commentary

Commentary by Sean Peche  – Fund Manager of the MI THORNBRIDGE GLOBAL OPPORTUNITIES FUND

Going against the crowd is difficult, especially when the crowd is having fun and making money. That’s why so few fund managers have the stomach to do so. But the sad reality is we all know every party eventually ends, so unless our research demonstrates a high probability of us making a real return for clients with limited downside, we are happy to “dance alone”.

We are certainly “dancing alone” in terms of geographic and sector allocation compared to most other Global Equity Funds and the MSCI World Index – we only have 18% invested in US companies compared to an index weighting of 68%, our European weighting is 46% vs the index of 19%, and our weighting in Japanese shares is 16% vs 6%.

Why are you so different?

Simply put – the price of the MSCI USA Index has tripled over the past 10 years compared to a doubling of earnings, and currently trades on 17 times earnings – not far off the average.

However, the real problem is that after many years of good times, the level of earnings for US companies is very high – the average net income margin for this basket of US companies has been 7.7% since 1995, but it’s currently nearly 50% higher at 11%. Paying high earnings multiples for unsustainably high earnings is one of the “paths to pain”.

In contrast, earnings for the MSCI European Index have barely grown in 10 years and the region is very out of favour because of: the war, high gas prices and fears of a recession. The result is low earnings multiples on relatively low earnings levels.

But why are you buying low growth European companies instead of high growth North American companies?

Because our research shows that the “party” has ended for many of the “high growth” North American companies, and we don’t want to own companies on high earnings multiples with high margins and deteriorating fundamentals. As for European companies, the war will eventually end, the gas price is already down 70% from the highs, European exporters and those with US$ denominated assets benefit from a weak EUR and the average mortgage rate in Europe is currently 2% not the 7% in the USA – European consumers with greater job security, lower mortgage rates and free health care may arguably be better off than US consumers in any global recessionary environment.

But while we use index data to illustrate a point, remember we invest in individual companies and certainly favour investing in growing companies – as long as we don’t have to pay too much for them.