Quality’s worst stretch in 40 years may be its biggest opportunity

We're now in the second-worst period of quality underperformance in 40 years and for patient investors, that may be exactly the opportunity they've been waiting for.

That's the striking data point Maroun Younes has been sitting with lately and it's not one he's dismissing.

Pull back the historical record and only one period beats it: the raging bull run from 2003 to 2007 that ended in the GFC. History, he argues, suggests this level of magnitude doesn't resolve quietly and when it does turn, it tends to turn hard.

Younes is a Portfolio Manager at Fidelity International, where he co-manages the Fidelity Global Future Leaders Fund and Active ETF (ASX: FCAP) and brings 16 years of investment experience across sectors ranging from technology and telecoms to infrastructure and steel.

He's the kind of investor who treats the market as a puzzle with no final answer, which might be exactly the mindset needed when the rules keep changing.

In this week's Q&A, he walks us through a recent portfolio addition, why he exited a high-quality US homebuilder, and what a Trump-Iran ceasefire could mean for stagflationary pressures, and your fuel bill.

What’s your most recent investment and why?

One business that we have liked for some time and added to a couple of weeks before the Middle East conflict erupted is TechnipFMC (NYSE: FTI), which is an energy services business that provides subsea and surface solutions and services used by oil and gas companies. 

Historically, we’ve liked it because it has had a strong order book, underpinning future growth for some time. In addition, we’ve seen the management team continue to expand margins. 

The balance sheet is net cash, which is supporting buybacks and dividends, and a relatively cheap multiple. 

With respect to the recent conflict, TechnipFMC has limited exposure to the Middle East itself (circa 4%), however the closure of the Strait has likely increased global focus on both energy security and diversity of supply, which would likely benefit TechnipFMC. 

Having said that, the stock has had an incredible run, up over 60% year-to-date and up 10% since the conflict started, so upside from here is much more limited.

What is the most recent investment you have trimmed or sold and what drove this decision?

We recently exited our investment in NVR (NYSE: NVR), a US homebuilder. Inflationary pressures from rising energy costs, putting potential upward pressure on US yields, is not a good recipe for homebuilders. As a high-quality, capital-light homebuilder with a net cash balance sheet, it also doesn’t have the highest beta to a housing recovery. 

So, if the US housing cycle is to remain muted, it’s not a stock worth holding, and if the cycle is to inflect a stage of recovery upwards, there are other names that would give us greater upside and leverage to the recovery.

What’s your favourite data point from this week?

I was recently comparing the MSCI World Quality Index to the broader MSCI World Index. I pulled 40 years of historical data, going all the way back to 1986.

This is the second-worst period of quality underperformance in 40 years. 

From June 2024 till now, the MSCI World Quality Index has underperformed the broader MSCI World Index by 30%. From 2003 to 2007, quality underperformed by 41%, and that was in a raging hot bull market leading up to the GFC. 

It hasn’t been rewarding investing in quality recently, but history shows this magnitude of underperformance may ultimately lead to a sustained period of quality outperformance.   

What was your weekly high – a standout market moment or highlight

Trump and Iran agreeing to a 2-week ceasefire to negotiate. Whilst this is important in many other ways, especially for those in the conflict zone, purely from a financial markets standpoint, it could help to alleviate some stagflationary pressures. 

Might also make it easier to fill up your car!

What was your weekly low – a market disappointment or challenge?

Perhaps not just from this week, but the lack of progress in improving the country’s productivity and GDP per capita, both of which have been stagnant for far too long.

What first drew you to markets and what continues to keep you inspired today?

It’s a fascinating world to be involved in. 

It’s a puzzle with no final solution as the landscape is ever-changing. This keeps things fresh and keeps you forever curious and on a learning curve.

What’s one piece of advice you’d give to new investors?

Don’t stop learning. Never lose your curiosity. And treat investing as a life-long marathon, not a sprint.

How do you unwind when you’re not thinking about the market?

I have two young kids, so I try and spend as much time with them as I can. I also enjoy reading and can spend time watching most sports under the sun.

Rapid fire! 🔥

Favourite investing book?

“More Money than God” by Sebastian Mallaby, a fascinating read.

Favourite investing or finance/markets-related podcast?

Business Breakdowns

The first thing you read each morning?

Trump’s tweets. Just kidding! The overnight summary emails I get from our US and European trading desks give me a lot of colour as to what happened while I was sleeping.

Favourite restaurant?

Cucinetta in Woolwich, although that’s closed for the time being as they undergo a brand refresh.

Something people are surprised to learn about you?

I’m a former State and National junior rifle shooting champion, but I ceased competing in 2002.

Think there’s a better pick? Prove it. Share your rapid-fire book, podcast, and daily read in the comments.

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Fidelity Global Future Leaders Fund and Active ETF (FCAP)

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