Andrew Hall, co-manager of the Invesco Perpetual Global Opportunities Fund, outlines how a challenging and ever changing market environment is causing assumptions about stock selection to be continually tested.
Global equity markets recovered in August after a short period of turbulence at the end of July/ beginning of the month. At the time this sell-off appeared to be fairly meaningful, as global equity markets fell 4% from peak to trough. However, the US ended the month at another record high, with the S&P 500 breaching the 2000 mark. This also marked the tripling of the March 2009 low of 666.79.
As equity markets moved higher we also witnessed a rally in government bond markets during August. This was particularly notable in Europe, where the 10-year bund yield reached an all-time low of 0.87%. Yields were driven down following comments from ECB President, Mario Draghi, that he was concerned about inflation expectations: “The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term.”
As eurozone inflation heads towards a five-year low, this is seen by many as a tacit acknowledgment that the ECB is increasingly likely to embark upon a programme of QE. While borrowing levels in Spain and Italy have never been lower, the lack of inflation and growth mean that debt levels continue to rise. It appears that asset prices are already starting to price in this shift in policy.
The fears around higher interest rates have dissipated, or at least are no longer at the front of investors’ minds. A similar ‘equity-like’ wobble was witnessed in high yield markets earlier in the month, but they recovered as demand for income remains undiminished by potential risks. Corporate bond markets are on track to post their third consecutive record year for issuance as companies take advantage of low yields. Acquisitions have nearly doubled in the US and the year-to-date tally is $2.3tn of announced deals globally.
We would highlight the tail risk of the potential for interest rates to rise more quickly than anticipated. As Fed Chair Janet Yellen noted in August: “If progress in the labour market continues to be more rapid than anticipated by the Committee, or if inflation moves up more rapidly than anticipated… then increases in federal funds rate target could come sooner than the Committee currently expects.”
We continue to be vigilant of the changing economic environment that the companies we are invested in face, stress testing our assumptions against these changes to ensure we have the right portfolio of stocks through the cycle.