Paul Cuddy

Lazard Asset Management (LAM) has announced the Australian launch of the Lazard Emerging Markets Equity Advantage Fund (“Fund”)^[1], allowing retail investor access for the first time to this long running quantitative solution in emerging market equities.

The Fund will be managed by Lazard’s highly experienced Equity Advantage team, which has been with LAM since 2007 and currently oversees US$35 billion for clients worldwide^[2]. The team combines proprietary quantitative insights with perspectives from Lazard’s global network of fundamental investors.

The investment strategy behind this Fund has been managed by Lazard since 2011, and it has a track record that is distinguished by its consistency of returns and history of generating alpha^[3].

“Our Equity Advantage team continues to attract interest from investors around the world, including in Australia. The team has a track record of delivering consistent outperformance, particularly in inefficient markets like global small caps and emerging markets,” said Paul Cuddy, CEO, LAM Asia Pacific. “By balancing exposures to key investment styles and controlling benchmark-related risks, the strategy has a history of performing in a wide range of market conditions.”

“We believe this Fund that uses a quantitatively based investment process will be a complement to the Lazard Emerging Markets Fund, which employs an actively managed fundamental approach. The Lazard Emerging Markets Fund has been available in Australia since 1997 and has a strong track record, including being recognised as an award-winning fund⁴.”

LAM’s Equity Advantage Team evaluates each company’s growth potential, valuation, market sentiment and financial quality relative to each company’s global peers. The number of securities held in the Fund will generally range from 175 to 300. Portfolio risks are managed by maintaining exposures that are similar to the benchmark including region, industry, country and capitalisation.

The Equity Advantage team also manages the Lazard Global Small Cap Equity Advantage Fund and the Lazard Global Equity Advantage Fundavailable for Australian wholesale and retail investors^[1].

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Paul Cuddy

Lazard Asset Management (LAM) has announced the launch of the Lazard Global Equity Advantage Fund in Australia, expanding access to one of its flagship global equity capabilities.

Designed to perform across market cycles, the fund applies a disciplined, bottom-up stock selection process that seeks to minimise unintended macroeconomic exposures. LAM’s active, quantitatively driven investment framework assesses companies on growth potential, valuation, market sentiment and financial quality, typically holding between 200-350 securities.

The fund will be managed by Lazard’s 20-member Equity Advantage team, which has been with the firm since 2007 and currently oversees US$31 billion in various quantitative strategies for clients worldwide*. The team combines proprietary quantitative insights with perspectives from Lazard’s global network of fundamental investors.

“Our Equity Advantage team has a proven track record of delivering consistent outperformance and a distinctive return profile when compared to many other quantitative strategies,” said Paul Cuddy, CEO, LAM Asia Pacific. “By balancing exposures to key investment styles and controlling benchmark-related risks, the strategy is designed to perform in a wide range of market conditions.”

Originally launched for institutional investors in 2008, the Lazard Global Equity Advantage Strategy is now available to a broader investor base through an Australian Unit Trust structure.

This latest launch further enhances LAM’s quantitative global equity offerings available to Australian investors, which also includes the Lazard Global Small Cap Equity Advantage Fund.

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*As at 12 November 2025

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Mr. Hogbin succeeds Evan Russo, who after two decades of contributions to Lazard will step into an advisory role following the transition. Mr. Russo joined Lazard in 2007, and in addition to serving as CEO of Lazard Asset Management, he has held several leadership roles during his tenure, including Chief Financial Officer of Lazard and Co-Head of Lazard’s Capital Markets and Capital Structure Advisory practice.

Peter Orszag, CEO and Chairman of Lazard: “We are excited to announce Chris as our CEO of Lazard Asset Management. We see this year as an inflection point for our Asset Management business, as we continue to build on our momentum and position the firm to meet evolving client needs. Chris’s leadership and success in growing a global investment business will help us to now accelerate progress toward our long-term strategy for Lazard. We are grateful for Evan’s leadership at the firm, and for his work guiding our Asset Management business through a critical transitional period while developing a solid foundation for Chris to build upon.”

Chris Hogbin: “It is an honor to join Lazard Asset Management and work with a renowned team of professionals who are committed to delivering best-in-class investment solutions to clients. I’m energized by the vision for the future of Lazard and the momentum behind the execution of its long-term growth strategy. I look forward to joining Peter and the team to help deliver the next stage of value creation for our clients and shareholders.”

Evan Russo: “At Lazard Asset Management, we have an unwavering focus on delivering differentiated insights and customized solutions for clients. With Chris’s client-focused approach and investment expertise, we are further strengthening our business for success over time. It has been a privilege to work with the extraordinary colleagues at Lazard and contribute to this firm’s remarkable legacy.”

Mr. Hogbin has spent his career focused on delivering for clients with a commitment to excellence. As Global Head of Investments at AllianceBernstein, he was responsible for overseeing all of the firm’s investment activities across public and private markets, including equity, fixed income, multi-asset, hedge fund, and alternatives solutions. Prior to that, he served as COO and then Head of Equities, with a focus on building a strong investment platform to help clients navigate increasingly complex markets. Earlier in his career, Mr. Hogbin was a top-ranked research analyst who led a global research function before shifting to the buy-side and then to broader executive leadership roles.

Mr. Orszag (continued): “Chris embodies our commercial and collegial culture, with an outstanding reputation that attracts top talent and experience aligned with Lazard’s global presence. At his core, Chris understands how to deliver exceptional investment performance, which is fundamental to driving success for active asset managers. We are thrilled to welcome Chris to lead our asset management business into its next phase, enhancing performance and service for our clients, evolving our business to meet client preferences, and contributing to firmwide profitable growth for our shareholders.”

Dan Schulman, Lead Independent Director of Lazard: “On behalf of the Board of Directors, we join Peter in welcoming Chris and expressing our gratitude to Evan for his service to the firm. Chris’s proven success as a global asset management leader, along with Peter’s ability to dedicate even more time to shaping our strategy and deepening client relationships across both businesses, will help us to further advance our overall ambitions for Lazard.”

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Paul Cuddy

Lazard Asset Management has announced the launch of its first exchange-traded fund (ETF) in Australia, providing investors and advisers access to an actively managed ETF portfolio of listed infrastructure companies.

The Lazard Global Listed Infrastructure Active ETF (ticker: GIFL) is listed on Cboe Global Markets. GIFL is a unit class of the Lazard Global Listed Infrastructure Fund which launched in 2005 and has A$2.0 billion of funds under management*. The actively managed ETF is made up of 25 to 50 companies from a select subset of the global infrastructure market that Lazard believes provide higher revenue predictability, profitability, and lower volatility.​

“By investing in the equities of listed infrastructure operators, such as electricity networks, toll roads, and other essential assets and related services, investors can gain exposure to predictable long-term earnings streams,” said Warryn Robertson, Portfolio Manager/Analyst on Lazard’s Global Listed Infrastructure Team. “In our view, not all infrastructure is created equal. Our unique approach focusses on a “preferred” subset providing an asset class that can deliver clear benefits: diversification, lower volatility and inflation protection.”

“This is an award-winning investment capability that has long delivered outstanding risk adjusted returns for our clients across the globe,” said Paul Cuddy, Chief Executive Officer (APAC) at Lazard Asset Management. “We are pleased to now offer this Fund in an ETF structure, so Australian investors can enjoy the simplicity of investing through an exchange.”

The Lazard Global Listed Infrastructure Active ETF (GIFL) has been successfully implemented by the same team that launched Lazard’s first global infrastructure fund almost two decades ago. As pioneers in global listed infrastructure investing, the team was one of the first to manage a dedicated global listed infrastructure fund anywhere in the world, and today is based in Sydney, New York, and London.

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Key takeaways

• AI is pivotal to the unfolding, and end state, of US-China competition.
• Geopolitical bottlenecks in the AI supply chain currently favour the US but its leadership in AI is not predetermined.
• Middle/great powers (i.e., Canada, France, Israel, the UK) can leverage AI to punch above their weight.
• Less developed countries will fall behind in the current race for AI.
• New international AI governance frameworks are on the horizon.

Lazard Geopolitical Advisory released a new report which examines geopolitical dynamics impacting countries and their approach to AI, policy responses and how they interact with increasingly politicised bottlenecks in the AI value chain (i.e., computing power, data, talent, and infrastructure), and business implications focused on the technology, healthcare, financial services, and energy sectors.

Competition over AI is most stark between the United States and China, which view leadership in AI as “the main game” in determining the outcome of US-China rivalry. This week the US Commerce Department this week announced an additional set of steps intended to restrict China’s ability to develop advanced AI and signalled that further action is on the horizon – the latest indication that AI, and emerging technologies in general, are on the frontlines of geopolitical competition.

Read the full report.

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Aaron Barnfather

As Europe enjoys summer, it does so in the knowledge that European equities performed solidly over the first half of 2023.

Not all good things last however, and European equities may struggle over the near term as the effects of higher rates begin to bite. When compared to their counterparts across the globe however, European stocks arguably look relatively better placed to withstand a potential global slowdown, despite the region facing major economic headwinds. Heavily inverted European and UK yield curves continue to point to a recession in both the eurozone and the UK, but higher bond yields mean European fixed-income investors can pick up attractive yields for modest risk. We suggest steering clear of riskier high-yield debt at this time.

European equity

Long days of golden sunshine and warm temperatures boost the mood of all but the most curmudgeonly soul. Yet, on the cusp of the holiday season in the northern hemisphere, it is not just the prospect of setting out-of-office messages ahead of poolside-lazing and beachbathing that will have many European equity investors in good spirits. They can also cheer a solid six months for European stock markets: the MSCI Europe Index delivered a total return of 14.2% in euro terms over H1 2023.

A largely resilient European economy has helped underpin this decent showing. Feared economic disruption caused by potential energy shortages never materialised, thanks to a mild winter and effective stockpiling of natural gas. And although the eurozone economy is now technically in recession following its -0.1% contraction in Q1 2023 and Q4 2022’s revised -0.1% GDP print, there has been scant evidence of any hard landing thus far in this unprecedented rate-hiking cycle. Meanwhile, inflationary pressures across the Continent and robust corporate earnings have given investors further reasons for optimism.

Hikes start to bite

Despite this generally benign scene, we continue to believe that caution should prevail. European equity markets look too sunnily disposed, in our view, given the macro backdrop and the lagging effects of monetary policy tightening. To explain our ongoing wariness, let us briefly recall the past few turbulent years through the lens of monetary policy.

The European Central Bank’s (ECB) response to the COVID-19 induced economic coma was a major increase in the money supply. M3, a measure of broad money including short-dated debt and deposits, grew by 12% year on year in December 2020, more than double December 2019’s figure (although well short of the 25% explosion in the US money supply over the same period, as measured by M2). Soaring inflation forced the ECB to follow with the most aggressive rate-hiking programme in its history, and it is not done yet.

Having thrashed the accelerator, the central bank is now stamping hard on the brake. The stimulative effects of the pandemic-driven money supply expansion are petering out just as multiple interest-rate hikes begin to bite in the real economy.

Our recent research meetings have tentatively suggested that these rate rises are starting to hurt corporate activity, whether it has been a construction company warning of project delays, a chemicals company reporting destocking in building supplies, or signs of a slowdown in infrastructure, especially in the US where the after-effects of the regional banking crisis are still being felt via tougher credit conditions.

There has already been a steady deterioration in the manufacturing sector over the past year, with the eurozone manufacturing purchasing managers’ survey remaining below 50 (indicating contraction) throughout the past 12 months and slipping to 43.4 in June.

Respite had been provided by the larger services sector, however. It has been buoyant, helped by post-pandemic catch-up consumer spending. But while the divergence in manufacturing and services activity levels—a pattern also recently visible in the UK and US economies—persists, services sector activity has apparently softened in the past two months, with the eurozone services purchasing managers’ survey edging lower to 52.0 in June, down from 55.1 in May.

Elsewhere, the recent revival in European consumer confidence stalled in May although improved in June. And while wages have been growing (+4.6% in Q1 2023), most consumers will still be suffering from smaller pay packets in real terms, given the annual eurozone consumer price inflation rate currently stands at 5.5%.

With the ECB still pumping the brakes hard, and the impact of earlier rate rises now being felt in the real economy, we believe a material slowdown in short-term economic activity and further weakness in the money supply seems highly likely—the latter is visible in the latest M3 data, which showed a 1.4% increase in the broad money supply growth year on year in May, the lowest rate of expansion since July 2014.

Brighter notes

European equity investors should therefore be braced for tougher times over the next few quarters. But we see reasons why Europe could be relatively resilient versus other major developed markets.

First, European earnings have surpassed expectations. The region has led the international pack over the past 12 months on earnings revisions.

This earnings strength may partly reflect the different mix of businesses within the European market, particularly in comparison to the more technology-biased US market.

European indices have a far greater weighting in financials, which have benefited from higher rates leading to earnings upgrades, while the Continent’s heavily regulated banks have been unaffected by the regulatory issues that have undermined bank stocks in other regions.

The solid earnings story also reflects the quality of Europe’s leading industrial names. They continue to enjoy healthy order books, fuelled by a wave of post-COVID investment and reshoring as companies fix brittle supply chains exposed by the pandemic.

This reshoring drive has meant European industrials have proved less sensitive to the stuttering post-Covid Chinese economy than otherwise might have been expected. Finally, European consumer demand has held up better than anticipated as the pinch from higher energy and food prices has eased.

Second, despite the relative outperformance of European indices versus US indices over the past year —which narrowed over Q2 2023)—and the robust earnings posted by European firms, the longstanding valuation discount to US markets has not budged. Global investors continue to look at the European market with either indifference or mild reticence, with flows into European equities being negative so far this year.

European equities still appear to be underappreciated.

Third, the breadth of Europe’s market strength compares favourably to the narrow leadership of the US market. The equal-weight version of the MSCI USA Index underperformed the market cap-weighted index by over 8% over H1 2023, as most of the US market’s gains came from a select group of predominantly mega-cap technology companies.

Significantly more European names than US names have outperformed a relevant index, suggesting the European market currently enjoys sturdier foundations.

AI: Europe has a seat at the table, too

Before closing the equity section, given the huge focus on AI in recent months, we would like to briefly touch upon what this powerful, society-changing trend might mean from a European investment perspective.

The market has proclaimed US and Asian tech giants as the future winners from AI’s exciting growth trajectory. In doing so, Europe has been overlooked, despite the region being home to some of the world’s best semiconductor equipment manufacturers.

These corporate leaders are poised to gain from increasing investment in semiconductor capacity. Europe also boasts a range of first-rate software and content companies that can use AI to enhance their offerings.

Lastly, European construction companies are well placed to meet the demand for building and insulating server farms.

AI will, of course, have long-term consequences for job security in certain fields. But strictly from an investment standpoint, its seemingly inexorable rise could provide a significant through-the-cycle investment tailwind for several European-based firms.

In summary, we believe European equity investors should be cautiously positioned in the months ahead as the squeeze from higher rates intensifies.

The European economy has been resilient to date, but the probability of this still ongoing fast-paced series of rate hikes ending in any scenario other than a marked slowdown seems low. The recent loss of momentum in the previously buoyant services sector suggests the ECB’s monetary medicine may be taking effect.

Nevertheless, with European earnings outpacing other developed markets, the US stock market’s dependence on a narrow band of names for leadership, and European equities remaining cheap on both a historic basis and relative to US equities, there is a credible argument to be made that Europe is better placed to ride out the next few quarters as the cycle likely worsens. Meanwhile, we will seek to add value through prudent stock picking, even as the region’s economic headwinds become more pronounced.

The spread between the highest- and lowest-rated stocks recently widened again. Therefore, we anticipate plenty of valuation anomalies to exploit through our disciplined relative value approach.

By Aaron Barnfather, Managing Director, Portfolio Manager/Analyst

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“Ron is widely respected as an authoritative strategist and has been an insightful voice for our business for more than two decades,” said Kenneth M. Jacobs, Chairman and Chief Executive Officer of Lazard. “He has built strong relationships with Asset Management’s global client franchise and his macroeconomic and market insights have been a true differentiator.”

Since joining Lazard Asset Management in 2001, Mr. Temple has held several high-profile investment and client-facing roles, including analyst and co-director of global research. Most recently, he has overseen U.S. equity and global equity strategies as well as Lazard’s MultiAsset platform. Prior to Lazard, Mr. Temple spent 10 years in a variety of financial services roles, including fixed-income derivatives trading, risk management, corporate finance, and corporate strategy. He has a Master in Public Policy from Harvard University and a B.A. in Economics and Public Policy from Duke University. He is a member of the Council on Foreign Relations, the Economic Club of New York, the CFA Society New York, and is the chair of Duke University’s Graduate School Board of Visitors.

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Ron Temple

The public health conversation has shifted to focus on when and how public life and economic activity can return to normal around the world. In a note to investors, Ron Temple, Co-Head of Multi-Asset and Head of US Equity, shares his thoughts what to look for on the road to recovery.

Economic update

The US employment report was the most important economic news of the week, propelling the US equity market almost 3% higher on 5 June. Consensus expectations called for the unemployment rate to rise to 19% and nonfarm payrolls to decline by 7.5 million. Instead, the report showed a 2.5 million-person increase in nonfarm payrolls and a decrease in the unemployment rate to 13.3% from 14.7% the prior month.

Forecasters missed this outcome primarily due to the negative story unfolding in the weekly jobless claims data, which showed another 1.9 million people filing claims in the week ended 30 May and a total of 42.7 million such filings in the prior 11 weeks.

The two data series are almost certainly both subject to mismeasurement in light of the unprecedented economic turmoil in the United States. However, there were clues in the weekly report’s continuing claims data that the employment report might not be as bad as feared. Continuing claims for jobless benefits tripled in the four weeks ended 24 April, rising from 7.4 million to 22.4 million. Since that time, the number has fluctuated between 20.8 million and 24.9 million. Backing into the numbers, the relative stabilization of continuing claims indicates that some number of people are finding new jobs or returning to their existing jobs.

The data from the employment report shows a similar story: 7.7 million people went from being unemployed to employed in the month of May, while an additional 5.4 million moved from being “not in the labor force,” defined as having worked or actively sought work in the prior four weeks, to employed. Partially offsetting this progress were 4.9 million people whose status went from employed to unemployed and 4.4 million who moved from employed to not in the labor force. The net of the two is a very positive number.

Overall, while the news certainly surprised us, it is unquestionably positive. We will watch the weekly claims data and June employment report very carefully to see if the positive story continues. We continue to believe data will be erratic for the next six-to-12 months as the economy begins to normalize. The various US states are opening in a largely uncoordinated way, and we believe some will pause or even reverse their reopenings as the number of cases begins to rise locally.

Households and companies are likely to husband their resources until they feel confident the recovery has taken root and is sustainable. That said, we could also see surges in demand for goods and services as people are finally able to return to restaurants, bars, and travel destinations. Our hope is that the reopening will progress smoothly and wisely, giving healthcare experts time to develop a safe, effective vaccine.

Policy response update

The European Central Bank (ECB) announced a €600 billion expansion of the Pandemic Emergency Purchase Programme (PEPP) to a total of €1.35 trillion. The ECB also announced that it would continue reinvesting proceeds from principal and interest payments through at least the end of 2022. The consensus expectation had been for an increase of €500 billion.

The upside surprise was encouraging coming on the back of the European Commission’s proposal of a European Recovery Fund the prior week. We are cautiously optimistic that the European Union might be reaching a turning point where it begins to act more decisively to break the economic stagnation that has afflicted the region since the global financial crisis.

On 5 June, US President Donald Trump signed the Paycheck Protection Program Flexibility Act into law. The bipartisan legislation relaxed the rules for forgivable loans issued to small businesses in the United States. Under the original rules, small businesses were required to spend at least 75% of the funds on payroll over a period of no longer than eight weeks. The requirements did not align with the cost structure of many small businesses, however.

Under the new rules, at least 60% of the funding must be used for payroll, and the company has up to 24 weeks or until 31 December to spend the funds, whichever is earlier. It also allows companies more time to rehire employees, extending the deadline from 30 June 2020 to 31 December. These changes should broaden the appeal of the funding to more small businesses. As of 4 June, 4.4 million borrowers have been approved for PPP loans totaling $510 billion, according to the Small Business Administration.

Investment implications

Markets spiked in response to the 5 June employment report, with the S&P 500 Index closing 5.7% below the record high close of 19 February and the median stock down just 8.9% since that point. Investors were encouraged by the prospect of the US economy reopening faster than previously expected, reviving cash flows into corporate coffers. The job data certainly offers a good reason for such enthusiasm.

We continue to remain more cautious, almost entirely due to our concerns over the pandemic and developments in terms of therapies and vaccines. Throughout the crisis, we have thought that the right call is to remain fully invested with a bias toward quality. We believe that is still the optimal choice, but recognize that lower quality, more cyclical stocks might take the lead temporarily if investor enthusiasm is sustained. We understand that there are always times in a recovery cycle when this is the case, but remain steadfast in our view that firstly, it is very difficult to call the beginning and end of low-quality rallies and secondly, that over a multi-year time horizon, high-quality stocks have sustainably outperformed lower-quality peers.

All told, we are unquestionably happy about the positive economic news, as it means less damage to household, corporate, and government finances. We hope the trend continues. In the interim, we would not chase the rally, but would instead remember that monetary policy is fading in scale relative to the supply of new government debt being issued.

As this net balance of supply and demand adjusts, the real economy will be the key driver of markets, rather than the flood of liquidity that propelled the initial leg of this rebound. The bottom line is that the fundamentals of each company and security are likely to become even more important as we move forward from this point. Security selection will be an increasingly important driver of total return, in our view.

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Ron Temple

The global economy requires three key building blocks to ‘exit’ COVID-19 in the safest, most effective way possible, according to Lazard Asset Management.

In a note to investors, Ron Temple, Co-Head of Multi-Asset and Head of US Equity, argued that improvements in healthcare systems, economic implications, and monetary policies, will enable the global economy to effectively leave the COVID-19 pandemic.

1. Healthcare systems

Testing: With more than 550,000 new coronavirus cases, global infections increased to 3.45 million, while deaths exceeded 244,000 as of 3 May. The United States accounted for 33% of the global infections and 27% of deaths. Encouragingly, new infection and death rates continued to decline in Spain, Italy, France, Germany, and in the US states that have restricted mobility the most.

Testing remains a top priority. Very few countries are testing widely enough to identify asymptomatic carriers of the virus. While the UK and France made significant progress in accelerating the pace, the US tested only around 10% more people than in the prior week. Estimates for the number of tests needed in the US to facilitate reopening the economy range widely, anywhere from 3 million per week to 5 million per day. What is easily agreed is that current testing in the US remains far below the lower bound of this range.

Therapies: Gilead’s antiviral drug remdesivir made headlines this past week with a successful clinical trial that accelerated recovery in patients hospitalized with COVID-19. On the back of this development, we adjusted our three scenarios for economic recovery to a more optimistic setting. In our base case, sustained recovery now begins in the third quarter of this year.

We believe that remdesivir, although not a cure for COVID-19, significantly truncates the left-tail, or worst-case, scenarios related to the pandemic.

Vaccines: Although vaccines historically have taken years to develop, in the case of COVID-19, we are optimistic that the timeline will be compressed based on a) the amount of funding and focus on development, with six vaccines already in clinical trials, b) the fact that many steps in the development process are being conducted in parallel rather than in sequence, and c) the breadth of novel and proven modalities currently being evaluated. We are encouraged by the magnitude of research efforts underway by so many firms.

2. Economic implications

Despite the positive therapy news, the pandemic continued to wreak havoc on the economy, with 3.8 million more Americans claiming jobless benefits last week, taking total claims to 30.3 million in only six weeks. In Europe, 10 million workers at 425,000 companies are now covered by special unemployment schemes in France, while 4.6 million are covered in Italy. In Germany, 718,000 companies have applied for the government’s short-term special work program.

Nevertheless, we have revised our three primary scenarios for economic recovery given the positive news on remdesivir. We now think a sustained recovery will begin sooner and unemployment will peak more quickly. However, we remain concerned about the potential for the pandemic to have lasting effects on growth.

Countries and companies are likely to exit the crisis with significantly higher debt, curtailing their ability to invest and innovate. We also expect to see some behavioural changes endure, such as more people working from home. That particular change would reduce the amount of miles car commuters drive every day, decreasing demand for oil and automobiles, as well as for office space in city centres.

Finally, we believe companies and governments around the world are likely to reassess the desirability of complex global supply chains, especially in essential areas such as healthcare and food, in light of the supply challenges that occurred during the crisis.

US-China tensions: Another factor clouding the long-term outlook: more intense US accusations against China regarding the origins of the virus and the transparency of China’s disclosures. The latest accusations by the Trump Administration–speculating that COVID-19 was accidentally released from a Chinese laboratory in Wuhan that has dual military-use purposes–in part resurrected suspicions that had been largely dismissed by experts several months ago. The US also accused China of obstructing the flow of information about the virus in ways that increased the severity of the pandemic. Australia joined the US in supporting a global investigation of China’s response, which only heightened tensions further.

While we do not see an imminent re-escalation in the trade war, the economic recovery would unquestionably be impaired by new tariffs or restrictions on trade that increase uncertainty for companies and consumers.

3. Monetary policy measures

During the week the Fed announced an expansion in the Main Street Liquidity Facility, opening the door further to non-investment grade borrowers tapping its facilities. Under the new terms, companies with fewer than 15,000 employees or revenue of less than $5 billion can apply for loans. Also, while the original guidelines on 9 April limited borrowing to $150 million, the Main Street Expanded Loan Facility now can lend up to $200 million at an interest rate of LIBOR + 300 basis points (bps). Borrowers cannot exceed a debt-to-EBITDA ratio of 6x with the incremental funding and must have a “pass” rating from the Federal Financial Institution Examination Council as of 31 December 2019.

In Europe, the European Central Bank (ECB) disappointed investors by not expanding its Pandemic Emergency Purchase Programme (PEPP) to include debt issued by companies that have been downgraded below investment grade since 7 April. During a press conference, ECB President Christine Lagarde emphasized repeatedly that the ECB has been, and will remain, flexible and will do whatever is required to support the economy and achieve its mandated inflation objective. Nevertheless, the questions during the conference implied that the markets do want more aggressive action from the ECB.

During the week, the Fed added $83 billion to its balance sheet, which stood at $6.66 trillion. This was the smallest increase since the week ended 4 March. The decelerating growth reflects slower purchases of both Treasuries ($62 billion) and mortgage-backed securities (MBS), though the $18 billion drop in its holdings was more than offset by a $38 billion increase in commitments to purchase MBS that have not yet settled. The ECB balance sheet grew by €64 billion to €5.35 trillion with purchases of €26 billion in securities in the PEPP and a net €9 billion under the Public Asset Purchase Programme focused on sovereign debt. The other increases resulted from financial institutions tapping the longer-term refinancing operations facility for €19 billion.

Investor takeaways

For investors, we continue to recommend focusing on security selection and prioritizing quality in issuers’ balance sheets, funding profiles, and ability to generate high returns on capital through the cycle.

For debt investors in particular, we believe that some highly leveraged issuers and structured securities remain unattractive and suggest emphasizing detailed cash flow analysis of all issuers. Of note, spreads on investment grade debt remain substantially above pre-crisis levels, and investors should not feel forced down the quality spectrum to generate income.

In the equity markets, we see excellent franchises trading at significant discounts to fair value and to levels of only a few months ago. While it is critical for investors to assess the near term and ensure that companies are not likely to encounter liquidity-related stress, it is also vital to recognize that the value of a company’s stock is the present value of all future cash flows to which shareholders are entitled. In other words, one or two years of weaker earnings may amount to a short-term reduction in cash flow rather than a permanent change in earnings potential.

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Warryn Robertson

Global equity markets in 2019 have been characterised by a late cycle rally, with extraordinary low monetary policy fueling investor demand for risk assets, most notably in momentum and growth equities, says Lazard Asset Management’s Warryn Robertson.

Mr Robertson who is a portfolio manager on Lazard’s Global Equity Franchise Team says that despite this, historically low interest rates should not be a justification for soaring equity markets.

“At this point, we believe it is worth remembering that interest rates are low for a reason, Mr Robertson said. “Many equity market investors seem to be falling into the trap of thinking that interest rates are low purely for their benefit. Investors are pricing in earnings growth expectations at normal levels, such that low interest rates are seemingly the rationale for paying higher multiples for many stocks.”

Mr Robertson believes this is at the heart of why so many investors are getting their company valuations wrong.

“If you lower the discount rate because bond yields are so low but maintain trend earnings, it is mathematically possible to justify some of the multiples we are seeing in global equities, most notably in the technology and consumer staples sectors. However, in the long run, a business cannot grow faster than the economy or economies in which it operates.”

Mr Robertson says at some point, there will be a reckoning.  “Either earnings are going to disappoint because growth is lower or over time rates have to rise. Either way, that is going to be a painful process for the most overvalued companies.”

Finding opportunity in 2020 markets

From a more local perspective, Aaron Binsted, Portfolio Manager on Lazard’s Australian Equity team, agrees that it is interest rates, not company fundamentals, which are driving Australian equity markets higher.

“Our concern is that the economic picture does not match with equity market valuations. We do believe that we are in the latter stages of a tech boom. Software stock valuations stand near to the highest levels seen since 2000,” says Mr Binsted.

“Even the valuations of more mundane sectors look challenged. The ASX Industrials Index is trading at a 30% premium to pre-GFC boom levels at a time when earnings estimates have been falling.”

The good news is that there are pockets of reasonable value in the market.

Mr Binsted says that the Lazard Australian Equity Team is seeing some value in quality resources companies with growth potential, including Rio Tinto and Woodside for example. Lazard also likes some domestic infrastructure names for their defensive earnings, and some growth stocks that have fallen out of favour, such as Domino’s Pizza.

Reflecting on the year ahead for global equities, Mr Robertson agrees that there are value opportunities.

“While we are value investors and our philosophical in our approach, Global Equity Franchise is a quality focused portfolio that buys forecastable businesses at sensible valuations. Today, in contrast to the broader equity market, we can find quality business trading at multiples similar to those over the past 5-years.

“We are confident that valuation focused investors will be rewarded for their discipline as we enter a late cycle period. History shows that when these cycles reverse, they do so aggressively,” says Mr Robertson.

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