Key Takeaways
- Major central banks re-embraced accommodative policy in 2019, and equity markets have surged year to date, with optimistic investors rotating into cyclical corners of the market more recently.
- Despite the equity market’s success, the risks that stoked recession concerns last year and helped drive the sharp fourth quarter 2018 selloff—including waning economic momentum, mountainous debt levels and geopolitical turmoil—persist.
- With its highly selective investment approach and focus on avoiding the permanent impairment of capital, First Eagle Global Fund is an antidote to the reactive impulses the “fear of missing out” can inspire among investors.
Equity markets have overcome their end-cycle anxiety to deliver impressive gains thus far in 2019. Given the magnitude of returns across stock markets globally, it is perhaps not surprising to see widespread reports of FOMO among investors. While the “fear of missing out” on incremental market gains can be a powerful psychological motivator, we believe investors’ primary concern should be the permanent impairment of capital and the impact that can have on the long-term growth of their assets.
At First Eagle, we choose to ignore the risk-on/risk-off dynamics that often drive poor investment decision making; in our view, the time is always right for selectivity. The First Eagle Global Fund seeks resilience from the bottom up, targeting companies that have the potential for persistent earnings power over time and that are available at a discount to our estimate of their intrinsic value. Our selective approach historically has enabled Global Fund to participate in the majority of the equity market’s upside while mitigating its downside, making it easier for investors to stay the course and positioning them to potentially generate better returns over time.
Markets Cheer Renewed Central Bank Accommodation…
This time last year, markets were in disarray. The headwinds that had begun to build in early 2018 turned into a gale by the fourth quarter, as the global financial structure appeared to reach a choke point brought on by the aggregate impact of Fed rate hikes and the slow runoff of balance sheet assets. Investors flocked to perceived “safe havens,” bringing an end to the slow, steady climb of US Treasury rates over the previous two years. Global equity indexes moved sharply lower as the year drew to a close— and in some cases into correction territory—while market volatility became more pronounced. Defensive assets like gold rallied as investors sought protection against downside risk.
A surprise policy U-turn toward easing communicated by the Fed in January 2019— eventually manifest in a series of federal funds rate cuts and the reintroduction of bond buying, and bolstered by a renewal of accommodative policies by other global central banks—helped coax investors back into risk assets. While defensive sectors like REITs, utilities and consumer staples were the primary drivers of the initial rebound, risk appetite has become more pronounced in recent months and investors have rotated into more cyclical sectors, particularly in international markets, as volatility has eased. Longdated sovereign yields bounced off recent lows, steepening yield curves in the process.
…But Has Anything Really Improved?
Beyond the largesse of central banks, however, it’s hard to see how the fundamental backdrop today is all that different from the environment that stoked recession fears late last year and helped drive the fourth quarter 2018 selloff. Further, the sharp 2019 rally—which has crowned the current US bull market as the longest in duration and the largest in magnitude—has stretched valuations, making markets all the more vulnerable to the persistent risks facing the economy.
Global economic momentum appears to have stalled, in part due to the ongoing trade war between the US and China; while an apparent thaw in Sino-American tensions has been cited as one of the tailwinds fueling the most recent resumption of risk appetite, definitive agreements have yet to be reached. In our view, the best part of the business cycle appears to be behind us, with unemployment rates at generational lows in many developed economies and corporate profit margins receding. The world remains awash in debt, with corporations and governments leading the borrowing binge. High sovereign debt levels combined with renewed policy accommodation not only may reduce the options available to fight the next recession, it may lead investors to question their faith in fiat currency, which could have widespread implications for financial markets.
Geopolitical uncertainty, if anything, has only gotten worse over the past year. The UK’s Brexit effort is now working through its second deadline extension, and a general election looms there. Impeachment proceedings on US President Trump are underway in the House of Representatives, while the buildup to November 2020 is gaining momentum. Protests in Hong Kong reportedly have grown violent, and its economy has slipped into contraction. The Middle East appears to be as volatile as it has been in some time as various countries jockey for influence in the region while the US tries to pull back. And that’s just a few top-of-mind examples of widespread geopolitical discord.
Global Fund as a FOMO Antidote
The short- and long-term headwinds mentioned above don’t discount the very real impact FOMO can have on markets. Herding behavior among investors has been well documented in academic research, and such performance chasing has been shown to have a significant impact on asset flows, particularly as passive investment vehicles have grown in prominence. Unfortunately for investors, such behavior often translates into buying high and selling low, as they pile into markets whose valuations may already be rich relative to historical levels.
First Eagle Global Fund is an antidote to the reactive investment impulses FOMO can inspire. We believe that a key to compounding wealth over the long term is to maintain steadfast equity exposure across market cycles while consistently seeking to avoid losses. We do this by applying our highly selective investment approach countercyclically, with an emphasis on assets that in our view exhibit resilience. As equity markets rally, we seek to take profits in those portfolio stocks we believe have gotten too rich, rebuilding our cash and cash-equivalent positions in the process. As markets decline and opportunities emerge to buy quality businesses at attractive prices, we deploy capital to build on or acquire positions in companies we believe will exhibit resilience over time.
Over its 40 years the Global Fund has navigated numerous bear markets—including one of the worst equity downturns in history during 2007–09—with a selective investment approach and an emphasis on protecting against the permanent impairment of capital. As you can see below, this focus has mitigated the impact of market downturns over time, providing a better experience for investors and encouraging them to maintain their equity exposure even in the most trying environments.
The opinions expressed are not necessarily those of the firm and are subject to change based on market and other conditions. These materials are provided for informational purposes only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any security. The portfolio is actively managed and holdings can change at any time. Current and future portfolio holdings are subject to risk. The information in this piece is not intended to provide and should not be relied on for accounting, legal, and tax advice.
