JPMorgan Global Growth & Income (JGGI ), the £2.4bn top performer in the Global Equity Income sector, racked up a 10% total shareholder return in the six months to 31 December 2023 underpinned by an 9.2% advance in net asset value (NAV) that beat the 7% increase in the MSCI All Companies World index.

This takes the trust’s underlying three-year returns including the 4%-yielder’s dividends to 47.6% against the benchmark’s 26.8%. The performance by fund managers Helge Skibeli, Tim Woodhouse and James Cook has put the shares on a small premium, enabling it to get a £34.5m share issue away last month.

While the team are positive on artificial intelligence (AI) and the prospect of interest rate falls, near-term economic uncertainties remain, and they are cautious about the outlook for global growth and believe ‘market expectations of increasing profit margins are unrealistic and headed for disappointment’.

In order to counter these uncertainties, they have been carefully picking which economically exposed cyclical stocks to buy, and are now ‘underweight low-growth cyclical, while being overweight high-growth cyclicals and defensives’.

Low-growth cyclicals, include banks, which have been a beneficiary of higher interest rates but the managers warned that ‘loan losses will begin to accelerate’.

‘We are still early in this cycle, but the riskiest parts of the lending market are usually the first to register pressure and there are early signs of trouble in these areas: US credit card delinquencies have risen more than 50% over the past year, and auto loan delinquencies are already above pre-Covid levels,’ he said.  

While a decline in bank margins is likely if interest rates remain elevated and borrowers default on loans, they said lower interest rates could also adversely impact lenders’ earnings and margins.

The portfolio does have a position in Bank of America, which the managers said has a ‘quality and profitable’ business model superior to international banks, and offers a yield of 6% when buybacks and dividends are included.

The fund is also underweight cyclicals in the industrial and consumer sectors due to unsustainable  earnings. Both sectors have enjoyed the ‘largesse’ of western governments during the pandemic but as demand normalises ‘earnings will contract’, the team said.

Instead, the managers prefer high-growth cyclicals such as semiconductor manufacturers Taiwan Semiconductor Manufacturing Company and Analog Devices, both of which have ‘increased capital expenditure significantly over the past few years, while volumes are cyclically low due to a reset in inventory levels’.

Defensive financial stocks are another area of interest, such as Chicago Mercantile Exchange which ‘we believe will benefit from increased interest rate volatility until the trajectory of rates becomes clearer and macro uncertainties abate’.

Although credit conditions remain a risk, the trio favour Mastercard given the ‘long-term growth opportunities as society shifts from cash to cashless transactions’.

‘This transition is likely to be most marked within emerging markets, but with cash and cheques still comprising about 30% of all payment transactions even in a digitalised economy like the US, we see scope for further growth in developed markets too,’ he said.

Skibeli’s defensive position has not been without its issues, however, as one of the most significant detractors in the second half of 2023 was the overweight to renewable energy producers.

It has exposure to RWE and Nextera Energy, which were hit by the cost of producing wind turbines increasing 40%, which outpaced the inflation uplifts in power price contracts.

‘Renewable energy stocks also experienced some selling pressure on concerns that the growth in offshore wind generation had inflated valuations to excessive levels,’ said Skibeli.