With markets selling off sharply in recent days, Jenna Barnard from the Strategic Fixed Income team and Andy Jones from the Global Equity Income team give their views on the drivers and implications.
Jenna Barnard, Co-Head of Strategic Fixed Income
The investing environment in 2018 looks classically late cycle in our mind. Almost textbook! The most recent (possibly final) spike in US 10 year yields in the last month was driven by real yields, not inflation expectations. This, combined with ever more attractive cash rates in the US, provides real competition to other asset classes. The equity sell-off in recent days follows a raft of downgrades in more cyclical sectors globally – autos, chemicals, semi-conductors, luxury goods and even packaging and cloud computing. The global growth slowdown, higher bond yields and oil prices is a challenging backdrop for many asset classes.
Andy Jones, Portfolio Manager, Global Equity Income
The past few days have seen a sharp correction in global equity markets, with the S&P 500 Index in the US having its worst day since February 2018. Within the markets, however, there has been significant divergence of performance, with Value stocks, overall, meaningfully outperforming Growth and Momentum on a relative basis. The primary reason for this rotation and overall market sell-off in our view is the continued increase in US bond yields. This has been driven by continued robust economic data, and it is important to note that although inflation and rates are rising we are still at low levels by historical standards.
On a fundamental basis we would expect economic activity to remain at healthy levels, despite concerns over tariffs, trade and political issues in certain countries. This should feed through to continued corporate earnings, cash flow and dividend growth. From a strategy perspective, the best way for us to navigate uncertain times is to ensure that we have an attractively valued portfolio of stocks. It is also important for us to be well diversified; for example, most telecommunications stocks are domestically focused and not typically impacted by trade; healthcare companies are also relatively insulated. By continuing to focus on valuation and the dividend paying capacity of companies we believe that current market weakness will provide attractive opportunities.