Gulf investors must diversify into global equities as weak oil prices persist

At a time when the United States has just begun tightening its policy cycle, Europe and Japan are implementing monetary easing measures, oil prices are plummeting and global geopolitical unrest is continuing, it makes sense for fund managers to start looking at strategies that are more suited to weaker markets, are more defensive and provide an extra performance boost from dividends.

After almost a three-year period of underperformance, a dividend strategy in a well-diversified global equity portfolio will perform better than a broad equity market. Here’s why.

The investment landscape

Looking at the global investment landscape, the US economy is growing faster than Europe. But some European economies are also on a recovery mode, including the countries most affected by the financial crisis, such as Spain.

In the Gulf, markets have been clearly impacted by slumping oil prices which weighed in on the equities markets. Apart from direct losses of oil revenues, investments have fallen and there is less wealth creation. Hence, the negative impact on sectors goes well beyond energy.

This subsequent negative investor sentiment is evident and had a marked reduction in various investments across different asset classes by Gulf Cooperation Council sovereign wealth funds.

Therefore, we continuously advise on diversifying away from the region and increasing global allocation to reduce risk and volatility and maximise returns.

Double-digit returns from equities are a thing of the past

We also believe that easy gains in the equity markets, when double-digit returns from equities were realised in each of the few years after the financial crisis, are over. Going forward, we believe that we will get 5-6 per cent total return from equities per year, where about half comes from dividends. In fact, Mirabaud Asset Management research – which analysed the returns from US equities over the last 130 years in periods of low but rising rates and low inflation – found that the annual return was 6.1 per cent with three quarters of that coming from dividends.

Therefore, in periods like today, it makes sense to maximise the dividend component, as we do, to gain some additional return from higher dividends.

We prefer adopting a bottom-up approach to portfolio construction. Every stock must be carefully chosen based on its individual investment case and potential for total return. A dividend strategy is a more suitable strategy to provide an added level of certainty and an extra boost in the form of dividend income, which in weaker equity markets can account for more than half of the total return.

The operative word: diversification

At Mirabaud Asset Management, we monitor important external events that influence our view on regions or sectors such as oil decisions by the Organisation of Oil Exporting Countries, central bank actions or geopolitical developments. At this stage of the economic cycle we favour defensive strategies.

During times of uncertainty and in a region which is highly impacted by the direction of oil prices, local equity investors need to diversify into global equities with a focus on dividends, with the intention of reducing risks associated with the oil price relationship with regional equities.

Additionally, diversifying equity picks by sector is as important. A broad exposure to different industries provides balance and hedging.

Looking ahead

While regional equities have taken a knock lately, we do forecast a stabilisation of oil prices in 2016, mainly as a result of slowing oil production in the US which should bring supply more in line with demand. Therefore 2016 should be a better year for regional equities; however, diversification into global equities will still be the main theme.

Kirill Pyshkin is fund manager of the Global Equities High Income Fund at Mirabaud Asset Management.