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Back to HomeHigh Conviction Call: Global Equities with High Quality Factors
Equities with higher quality characteristics remain attractive. They have proven to be more resilient amid COVID-19 and their growth is likely to accelerate faster than other stocks as economies start to recover.
Equities with higher quality characteristics remain attractive. They have proven to be more resilient amid COVID-19 and their growth is likely to accelerate faster than other stocks as economies start to recover.
Higher quality companies continue to stand out, having outperformed the broader MSCI World global equities benchmark (+36.1% vs +27.7%) and generally maintaining a strong upward trend.
Although this momentum has ebbed and flowed in line with localised resurgences of COVID-19, quality equities continue to be driven by multiple themes (Figure C7) and display promising characteristics:
- A high return on equity, which reflects earnings growth potential
- A low debt-to-equity ratio, demonstrating financial discipline in borrowings
- Low variations in earnings, representing consistency
High valuations (22.9x), due to the larger weightage in the technology sector, remain a concern for some investors. Yet earnings are expected to increase in 2021 due to these companies’ resilient growth during COVID-19.
Low interest rates and bond yields have also driven valuations higher. Furthermore, trends such as relatively low growth plus low rates are expected to be anchored by the US Federal Reserve for the next three years. Equities with high quality factors tend to be compared with bonds, hence low bond yields will have a positive effect on prices of such equities.
These dynamics should breed investor confidence – high-quality equities that deliver strong growth are appealing alternatives to bonds with low yields. In addition, relatively loose central bank policies and government funding to stimulate domestic economies should support quality equities.
Figure C7. Equities with high quality factors are driven by multiple themes in the post-COVID world
Quality Equities
Demand for third party software and services to drive productivity gains
Online consumption of services and entertainment benefit e-commerce, content streaming services and digital advertising
Ageing population and Emerging Market growth benefit high quality healthcare companies
Companies using data analytics and information services to derive sustainable and recurring revenue benefit
COVID-19 has accelerated digitalisation of brick-and-mortar retailers, increasing their resilience with new customer reach
China’s economy has improved significantly post the COVID-19 outbreak
Expansionary fiscal and monetary relief packages may reduce severity of global economic downturn
Quality Equities
Demand for third party software and services to drive productivity gains
Online consumption of services and entertainment benefit e-commerce, content streaming services and digital advertising
Ageing population and Emerging Market growth benefit high quality healthcare companies
Companies using data analytics and information services to derive sustainable and recurring revenue benefit
COVID-19 has accelerated digitalisation of brick-and-mortar retailers, increasing their resilience with new customer reach
China’s economy has improved significantly post the COVID-19 outbreak
Expansionary fiscal and monetary relief packages may reduce severity of global economic downturn
Source: Wellington Management
