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Perspectives

Stable Stocks to Smooth Volatility

Volatility continues to be a feature of the markets due to uncertainty around interest rate rises and geo-political events, choose stable stocks if you don't like the bumps

External Writer 29 May, 2014 | 4:24PM
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There has been a big shift in sentiment within equity markets since the beginning of the year. While markets have broadly remained flat, there has been a rotation of performance from the small and mid-caps to mega caps. In addition, corporate activity has drifted up the market cap scale. It is commonplace to see bid activity for smaller companies, but we are increasingly seeing bids being made for larger companies, such as Verizon’s takeover of Vodafone. We expect much more bid activity in the remainder of 2014 and also a high level of new issues through IPOs if the equity market is firm.

This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Richard Marwood, manager of the AXA Distribution Fund, suggests investors seek stable stocks and ensure their portfolio is well diversified for a smoother ride

We prefer companies with robust business models that we believe can withstand tough conditions and market shocks, and seek companies with the potential to pay attractive dividends. Many companies in the water sector have such attributes hence why we have bought into that sector. Water is an everyday need and these companies have good pricing power, strong overall gross cash flows and good dividend predictably. Like any sector however, it has its weakness, and these companies can be affected from time to time by the political agenda.

Diversify, Diversify, Diversify

Compared to gilts and cash, equities have been the star asset class for over 100 years, and a key driver of long-term returns, but this is not without its ups and downs in the shorter term. Given market volatility is expected to continue, many cautious investors will want to diversify their exposure and seek allocation to other asset classes.

Index-linked gilts can hold up against market volatility and are a wonderful portfolio diversifier, being uncorrelated or negatively correlated with other major asset classes. The added proof against inflation makes them uniquely attractive. A large proportion of exposure to index-linked gilts in the AXA Distribution Fund is in the shorter dated maturities, which are the least volatile and easiest to turn into cash if needed.

Expect the Unexpected

Two main issues affecting markets this year are a potential rate rise and political events taking place in the run up to 2015’s UK general election. While it is a certainty that rates will rise – they are too low and need to be normalised – the timing of this is hard to call. Policy decisions as we approach this election will be difficult to predict, as shown in the recent Budget. These all have potential to shock the market, and investors need to ready their portfolios.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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