Q1 2018 Update - Morphic Asset Management


How have global equities performed so far in 2018?

2017 was an excellent year for equity investors. It was one of the best years on a risk-adjusted return basis. By contrast, Q1 this year has been much more challenging. We started out really well in January and global markets were even up 7.6% at one point. Over the following months, markets collapsed a little bit on the back of these volatility funds, then rallied back, and in the last few weeks, we have seen a lot of talk about Trump. Markets finished down between one to two percent on the quarter, but it was a very volatile quarter to get there.


Figure 1 – MSCI AC World Index since January 2017, normalised in USD



Source: MSCI

What risks are you concerned about right now?

The Morphic team has an overall positive view on the market, even though we have seen a bit of volatility over the past few months.

However, the biggest risk is exogenous, which is Mr. Trump does something really silly. He has a history of saying many things but we are yet to see how much he actually does. Markets are trying to push higher but Trump keeps dropping “tape bombs” which are more tariffs. This could potentially escalate into China selling Treasuries.

The bigger longer-term endogenous risk is that the US Federal Reserve over-tightens and raise interest rates too much, which could end up slowing the economy and pushing into a recession.


What is your outlook and how are you positioned?

We remain bullish although the last months tested our views. We would have expected markets to push a bit higher, so at this point, we remain largely invested. The Morphic Funds remain positioned for the upside.

Japanese and Asian markets continue to outperform. Emerging Markets (EM) are generally seen as you sell them when you get worried about the world. So, one would have thought that if investors are worried about tariffs, Trump, China and a trade war, EM would underperform. Well, EM actually outperformed the last couple of months and that is actually an interesting tale. That says to you that if markets do start to rise again, we will probably be led not by the FANG-type stocks out of the US but by EM stocks. So that is where we are focusing our effort.


Have you made any new portfolio additions?

Among the new additions over the last quarter, I think one stands out as an interesting stock that our viewers might know: Pilot.

Pilot makes pens. The pen sector globally is actually really interesting: there are only six large pen companies and two of them are Pilot and Mitsubishi Pencil which are both listed in Japan. Pilot is a very cheap company and what is interesting is that pen usage is actually growing, particularly in Developing and Emerging Markets and these guys are taking market share.

Neither of them has traditionally been willing to engage with investors. We have been working really hard with them to try and convince management that they have a great story to tell. They pay out dividends, they care about shareholders, they are focussed on running their business. But they should get out there and actually engage with investors a bit more. So, we think this is a fantastic prospect and we are hoping we can work with management to grow this and grow their business as well.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Share: Facebook Twitter LinkedId

Subscribe To Updates

Subscribe now to get the latest reports and insights from
Morphic Asset Management.