Global funds sector review – light at the end of the tunnel?

There are signs that inflation around the world is slowing, and many think it might have even peaked.

However, this has not been the case everywhere.

UK inflation was reported in December 2022 at 10.5%, marginally down from its peak of 11.1%. It remains to be seen if the recent falls will continue, or whether inflation will remain sticky.

Japan also reported inflation of 3.8% in November 2022, the highest it’s been throughout 2022. However, unlike most central banks, the Bank of Japan has indicated it will not be tightening monetary policy (increasing interest rates) to combat inflation.

Inflation slowing has definitely been the case in the US though – the world’s largest economy.

US inflation has fallen for the sixth month in a row after peaking at 9.1% in June 2022. The latest figures released showed the rate of increase in the consumer price index (CPI) fell to 6.5% in December 2022. While it’s good to see CPI falling, it’s still well above the US Federal Reserve’s (Fed) 2% target.

What this means for interest rates in the US

Interest rates have continued to rise as the Fed tries to control inflation. The latest rise was 0.5% in December, the seventh rise in 2022. This breaks the pattern of the previous four 0.75% rises from the Fed. The impact of slowing rate rises and falling inflation is likely to be positive for stock markets.

The difficulty the Fed now faces is knowing when to stop.

Central banks raise interest rates when they want to take the heat out of an economy and reduce demand. Interest rate rises increase the rewards for savers looking to earn interest on their cash. However, it makes it more expensive for consumers and businesses to borrow money, so they have to balance slowing the economy with the risk of going too far and slowing growth to the point of tipping the economy into recession.

Although the consensus is that the US will enter a recession at some point in 2023, the depth of the recession is highly debated.

With roughly 70% of the US GDP made up of consumer spending, if the Fed raise rates too far, the likelihood is the recession will be much worse than it potentially needs to be. But if they don’t raise rates enough, inflation could stay elevated throughout 2023 and beyond. It could even start to rise again.

What’s happening in China? – Xi finally caves

It’s been a rocky year for China. Economic growth has been well below its 5.5% target.

The property market has continued to slow as the government clamp down on excessive borrowing. China’s zero-tolerance Covid-19 policy has also meant different regions have gone in and out of lockdowns. Despite all of this, in October, President Xi was voted in as leader for an unprecedented third term.

He’s since implemented a massive policy shift regarding the zero-Covid policy which has been a key reason for slowing economic growth. Despite the initial reluctance to drawback the Covid-19 restrictions, ongoing pressure from the public has led to Xi finally loosening these policies.

It’s difficult to say whether this will be the catalyst for China to kickstart growth again. But the policy shift has led to nationwide Covid-19 infections surging, which is disruptive for the economy.

Manufacturing and services both contracted, and retail sales declined by 5.9% year-on-year too, in the period to the end of November 2022.

President Xi’s policy shift caught many off-guard. However, investors are still hopeful they’ll get through the initial spike in infection rates and get back to the high export, high growth economy we’ve been used to.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments and any income they produce can rise and fall in value, so you could get back less than you invest.

How have global markets performed?

Global stock markets have been volatile this year, and major stock markets have delivered mixed results over the 12 months to the end of December. Over the past year, the broader global stock market has fallen 7.30%*. As always though, past performance isn’t a guide to future returns.

The FTSE All-Share rose 0.34% over the year to the end of December 2022. Some of the larger constituents of the UK market include oil and gas companies as well as industrial miners, who’ve benefited significantly from rising commodity prices.

China’s market on the other hand, has fallen 19.41% over the past 12 months. Slowing economic growth caused by on-going Covid-19 restrictions and high infection rates, along with a struggling property sector, have all led to weaker share prices.

Oil and gas had the highest returns of any sector over the past 12 months with a gain of 48.16%. Commodity prices increased off the back of the conflict in Ukraine and the sanctions on Russia that followed.

The disruptions in supply as a result of the conflict pushed the price of oil and gas up significantly. More recently these prices have fallen to pre-conflict levels, in part due to concerns of a global recession and therefore the potential for reduced demand.

Technology was the sector with the lowest returns over 12 months, returning -26.00%.

Global technology stocks suffered from increasing interest rates and high inflation eroding the value of future potential profits. This led to investors turning away from the sector and into more defensive sectors deemed to be a necessity, regardless of how healthy the economy is.

One-year stock market performance

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/12/2022.

Past performance is not a guide to the future. Source: *Lipper IM, to 31/12/2022.

How have our Wealth Shortlist funds performed?

Global funds on the Wealth Shortlist delivered different performances over the past year, with some faring better than others.

Funds investing in companies undergoing a turnaround or those focused on paying a dividend, otherwise known as ‘value’ focused funds, did well. Those investing in companies capable of above-average earnings growth, also known as ‘growth’ funds, took a hit.

One year is a short period to assess the skills of a fund manager. Managers with different strengths, styles and areas of focus will perform differently over time.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.

Remember, all investments can fall as well as rise in value, so you could get back less than you invest. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Jupiter Global Value Equity has been the best-performing fund in the global sector of the Wealth Shortlist over the past year. The fund aims to invest in more value focused companies whose shares can be bought for less than their true worth. The fund returned 16.20%.

The managers have benefited from the value style coming back in favour in 2022. The fund’s investments in the consumer staples and energy sectors have been beneficial with the increase in inflation and higher commodity prices favouring these sectors. The fund also invests less in the US and technology sector, which helped performance.

The Abrdn Global Smaller Companies fund was the weakest performing fund in the global sector of the Wealth Shortlist. The manager’s growth-focused investment style has had a particularly tough time since the start of 2022. The fund’s investments in the US and in certain sectors like technology and industrials, have felt the most pain.

The fund is likely to perform better when growth investing is in favour, but not so well when value companies are in vogue. The fund, and its managers, have a good long-term record. We rate the team’s disciplined investment approach that’s been used across a range of funds over the years.

FIND OUT MORE ABOUT JUPITER GLOBAL VALUE EQUITY, INCLUDING CHARGES

JUPITER GLOBAL VALUE EQUITY KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT ABRDN GLOBAL SMALLER COMPANIES, INCLUDING CHARGES

ABRDN GLOBAL SMALLER COMPANIES KEY INVESTOR INFORMATION

Past performance is not a guide to the future. Source: *Lipper IM, to 31/12/2022.

Fund Insight: our weekly email

Sign up to receive our expert fund research and insights.