Global Income Stock Selection in a Volatile World
Firstly, US Fed’s stable interest rate policy ended and after rates were raised in December 2015, they were perceived as no longer being the last resort buyer of risk assets. This raised the risk premium in the equities markets, affecting the discount rate used by analysts for stocks with earnings growth prospects over the long term.
In January the Bank of Japan surprised markets and investors by moving to a negative interest rate policy and added to the growing list of countries adopting this policy. Banks were hit hard as investors worried about their ability to generate earnings in such an environment.
We have also witnessed a weaker economic environment as growth has been downgraded, not just in emerging markets but also around the globe. In this cycle, we see little contagion into equity markets from the liquidity and debt problems faced by credit markets. There are not the same problems arising in the high yield credit markets as a result of exotic creations like CDO's (Collaterised Debt Obligation) that we’ve seen before. Investment grade credit seems much more stable.
We are still advocating taking risk in portfolios, but risks undoubtedly remain with regard to politics, policy and debt overhang. In this environment exposure to sustainable yield remains a key investment theme.
The volatile macro sentiment often triggers a "flight to safety" investment mentality, and we have seen a significant rise in exposure to defensive large-caps, which benefits income funds that favour such names. These defensive large caps are now at historic valuation highs and don’t look good value if you believe that risk will still be rewarded. Diversified opportunities remain from dividend growth and dividend upgrades in this environment.
- Global consumption remains strong, reflected by auto sales
- Economies seeing growth slow, but not seeing a step-change
- These periods where fundamentals don’t work, usually last 3-4 months at most.
- Parts of the market on excessively high valuations
- Growth keeps being revised down
- Politics and policy can catch investors off guard.
Kevin Troup, Investment Director Global Equities, Standard Life Investments
First published in Investment Week 11th April 2016