Economic growth moderate but positive in 2014 – BlackRock’s Reeve
Stuart Reeve, co-fund manager of BlackRock’s BGF Global Equity Income Fund, reflects on the last three years, discussing where he currently sees opportunities in the global equity market and shares his outlook expectations for 2014.
Traditional high yielding sectors – US utilities and telecoms – are proving a struggle to find opportunities in. Several issues, such as high debt levels, regulatory uncertainty, and a lack of growth mean that companies in both sectors often fail to meet our quality test. Admittedly, some will pay a dividend but on the whole they are not offering sufficient dividend growth potential. Similarly, the Fund only holds 6% in financials, which makes us stand out because global income funds typically have a much higher allocation, of 15-20%, to the sector. However, we do not feel these companies offer the high quality, stable criteria that we are after.
Looking towards 2014, there will be an environment where economic growth is moderate but positive. Interest rates will undoubtedly remain low for a number of years, meaning further reliance on companies that can steer through a low growth environment. That being said, the sweet spot in the equity income market is to play at the quality end of the spectrum. As such, the best investment opportunities lie in companies offering these high quality characteristics and very good cash flow generation. There is a perception that quality income stocks are expensive, but in reality there are sensibly valued companies to be found, ones which should be able to grow, regardless of the macro environment.
Our investment process has been the driving force behind the returns experienced over the last three years. Operating in a global space means there is a huge remit for finding ideas, literally taking the pick of the best companies with a focus on holding multi-national companies with geographically diversified revenues. These are quality companies with an attractive yield and capable of growing their profits and cash flows. Consumer staple companies, large cap pharmaceutical companies, and high quality industrials are all businesses with these characteristics on the global stage at the moment and in a climate of economic uncertainty, albeit with some signs of improvement, finding quality companies is no mean feat. However, by finding such high quality companies and then employing a long term buy and hold strategy, volatility is materially reduced.