The chief investment officer for international equities at Goldman Sachs Asset Management, who oversees about $15 billion, says bouts of volatility will continue as nervous investors dump shares at even the slightest hint of bad news. Yearly returns on stocks will probably be in the mid-single digits as low inflation and high debt constrain growth in the biggest economies, he says. That’s about in line with the average over the past two decades, though down from the 12% average throughout the recovery from the 2008 crisis.
Shares have just clawed their way back to where they started 2016, after concern about collapsing oil prices and the potency of central bank stimulus drove a global stock gauge to a two-and-a-half-year low in February. For Mahindru, the world is still struggling after the kind of recession that generally takes a decade or more to overcome. He’s not alone in seeing muted returns, with US equity strategists predicting just a 3.3% gain in American stocks for the rest of the year.
“The market is very skittish," Mahindru said in a phone interview from London this week. “Anything that can be interpreted as negative, the market is interpreting it negatively," he said. “It doesn’t help me sleep but actually it gives me more opportunities."
Mahindru runs Goldman’s flagship Global Equity Partners Portfolio, which holds 25 to 35 companies with high and defensible returns, predictable business models and lower valuations—a strategy that the company says should perform well even when the market turns bad.
The fund has returned an annual average of 5.6% over the past five years, against a 6.8% gain for its benchmark, the MSCI World Index denominated in dollars, according to data on Goldman’s website. While Mahindru declined to name companies it buys, the two largest holdings are Yum! Brands Inc., owner of the KFC, Pizza Hut and Taco Bell fast-food chains, and Alphabet Inc., the parent of Google Inc., according to the website.
Mahindru sees scope to exploit a sell-off in European shares by picking global businesses that happen to be listed there. On China, he expects more volatility as the economy shifts from manufacturing to services, where the government has much less control. He favours consumer businesses associated with a high standard of living, anything from health-care to food quality and even sportswear. A measure of European stocks has lost 6.2% in 2016, while the Shanghai Composite Index was down 13% through Wednesday.
“When people say, ‘I don’t want to own Europe at all,’ that gives us an opportunity," Mahindru said. In China, “we tend to stay away from state-owned enterprises and focus much more on the private sector, where we find good businesses."
Mahindru is predicting economic expansion of just 1% to 1.5% in Europe this year and said the consensus on China’s growth trajectory is too high. It’s a view he shares with billionaire bond manager Bill Gross, who has said it’s delusional to think China is growing at a 6% annual pace. The International Monetary Fund this week raised its outlook for growth in the country to 6.5% this year and 6.2% in 2017.
After a 14% slump this year through Wednesday, Japan has one of the cheapest developed markets and it’s a favourite of Mahindru. It’s a contrarian view after 13 straight weeks of net selling by foreign investors, the longest streak since 1998. The Topix index trades at 13.1 times estimated earnings, compared with 16.7 for the MSCI World gauge. Mahindru says Prime Minister Shinzo Abe’s overhaul of corporate governance is gradually making firms more shareholder-friendly.
“People shouldn’t expect this to happen overnight," he said. “As people start to change in Japan and Abenomics starts to take effect, corporate reform is really starting to change, and we’re seeing it when we speak to companies."
Turbulence has calmed in markets after surging at the start of the year. The VIX Index now trades below its average for the past five years after jumping to the highest since September during the February rout. The MSCI World Index posted an average annual gain of 6% over the past two decades, and a 12% average advance from 2009 through 2014. The measure slid 2.7% last year in a sign investors were tiring of the bull run. Stocks across Asia climbed on Thursday, with the Topix rising 2.9%.
For Mahindru, who ran a fund focusing on financial companies for a decade at Goldman and also covered UK and European equities, one of the main sources of volatility may be about to recede. He says the price of oil has probably reached a bottom and will hover around $40-50 a barrel. US crude traded at $41.10 as of 3:44pm in Tokyo.
For all that, he says price swings are here to stay, and he’s not bothered by it.
“You do need that volatility," he said. “When it’s a pure upward-sloping market where it’s just going higher and higher day after day, that’s actually quite difficult to demonstrate your value." Bloomberg