‘This is just a normal market environment. The abnormal period was the one we have been in since 2008, but because everything went on for so long, investors have somewhat forgotten about cycles and volatility.'
Set against a backdrop of inflation hitting multi decade highs and increased market volatility, investor sentiment towards global equity income funds has seen a huge turnaround in the past 12 months.
With investors still focused on growth, the IA Global Equity Income sector saw flat net retail sales in 2021, yet to date in 2022 – and the latest figures go up until October – net inflows have totaled £2.63bn and it was the top selling peer group among UK retail investors in both April and June.
So what has been behind this dramatic shift? Nick Clay, manager of the Redwheel Global Equity Income Fund, says as inflation has proved more stubborn than many expected, the “penny has dropped” for investors that the days of everything going up in one direction are over.
“I used to call this the Taylor Swift ‘Shake it Off’ environment,” he says. “We had quantitative easing, interest rates at zero and everything just went up regardless. However we have now moved to an environment where the market is fixated on bad news and the best song analogy for this is Garbage’s ‘I’m Only Happy When it Rains’.”
Given such a pivot, which has seen inflation no longer perceived as being transitory and therefore interest rates have risen considerably, Clay says investors have been served a reminder that stock markets don’t just go up, they are volatile.
“This is just a normal market environment,” he says. “The abnormal period was the one we have been in since 2008, but because everything went on for so long, investors have somewhat forgotten about cycles and volatility.”
However Clay says it is now slowly dawning on investors that things are now returning to normality, which when it comes to growing their wealth, is leading them back to equity income strategies.
“Historically compounding a dividend has been a pretty attractive way of growing your wealth,” he says. “We call it the tortoise way of investing, you do it slowly and you compound your money over time, rather than the hare way of investing of trying to get rich quick. People have realised the tortoise isn’t dead and that’s why many are coming back to this area.”
Looking forward into 2023, Clay believes a recession is coming and in such an environment he says he wants to invest in those companies that are able to suffer the result.
“What I mean by this, is we want to hold those companies that can suffer different outcomes for their businesses, or different outcomes for the economy,” he says. “These qualities weren’t relevant when everything was going up, but all of a sudden in 2022 they have become more important.”
For Clay, the exciting opportunities within the market going into next year are those companies which in the past have been treated as being highly cyclical, but which in reality will not be.
“There are two areas of the market where this is the case,” he says. “These are luxury goods and semiconductors. The market has treated both as been highly cyclical, but history shows us that it is not the case and we think both could surprise next year.”
Indeed, using history as a guide, Clay says it will teach investors that in their jigsaw of funds they want in their portfolios for both 2023 and well beyond, a compounding durable dividend which can grow in-line with inflation will always serve them well from a total return point of view.
“It’s a slow lesson and it will take a few years for the penny to drop for everyone,” he says. “But I think it will slowly dawn on investors as cycles return back to markets that this is a way of investing that has been proven to work in the past and therefore remains a highly appropriate way of trying to grow your wealth over time.”
Key Information
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Past performance is not a guide to future results. The prices of investments and income from them may fall as well as rise and an investor’s investment is subject to potential loss, in whole or in part. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of Redwheel. This article does not constitute investment advice and the information shown is for illustrative purposes only.
