This article is part of Morningstar's "Perspectives", written by third-party contributors. Here, Will Meadon, co-manager of the JPMorgan Claverhouse Investment Trust shares his market musings.
The world which was converging is now diverging and comforting, old, analogue economic and market parameters are quickly being replaced by digital phenomena which, as yet, are difficult to fully understand. Even the authorities seem to be in the dark, since there is no obvious policy framework and when we have seen such attempts, like Mark Carney’s 7% unemployment trigger for interest rates – it wasn’t pulled, even when unemployment fell to 5.5%.
Quantitative easing and ultra-low rates have morphed from emergency medicine to lifestyle choice. Currency trading is increasingly the policy of choice. Against such a back drop, markets have become more volatile and short term.
We believe in patient investment in strong, well-managed, reasonably-valued companies which can grow profits through a prolonged period of low or zero inflation. Our strategy is certainly not predicated on the “Fed-watching-markets-watching-Fed” game. Our strategic views have not, unlike share prices, changed much in recent times:
Yield
Hunt for secure yield is still the biggest global investment theme. With UK inflation at zero, a prospective nominal yield on FTSE 350 of more than 4% is of course a real one of the same amount.
UK Politics
Right of centre stability for at least five years is a global rarity. This provides greater certainty for corporates and investors. Time horizons should lengthen, justifying a higher PE.
Equities
Stocks are highly correlated with a falling oil price, which is being taken as a proxy by many investors for future global growth. Whilst undoubtedly bad news for companies in the oil and associated industries, we view the low oil price more as a corporate and consumer stimulant rather than a harbinger of deflationary doom.
Zero inflation and real wage growth has pushed UK consumer confidence to a 15 year high, meanwhile the US is close to full employment and is enjoying growth annualising at 3.7% pa. Any stability in the oil price will see a rise in growth/inflation expectations which will surely be good for equities.
Cash
Corporates recognise cash is dilutive and will continue to distribute/spend it in shareholder friendly ways. M&A has continued to be strong over the period, the £50 billion approach of AB InBev to SAB Miller being just the latest in a long line of recent deals. Special dividends also continue to be paid in abundance.
Regulation
Regulation has resulted in under-ownership of risk-asset equities by traditional institutions, which creates a wonderful opportunity for those who can own them. The demise of old fashioned market making, for the same regulatory reasons, has removed a valuable volatility buffer.
China
The Chinese economy is certainly slowing but is still forecast to grow at 7% this year, which is precisely the same amount it was forecast to grow when estimates were first being made for 2015 two years ago, ditto 2016 with forecasts of 6.8%. The much talked about devaluation of the Yuan resulted in a net move against the dollar of a mere 2%.
The Chinese stock market was a bubble on the way up. We therefore shouldn’t get too worried as it deflates.
Greece
Tsipras has been re-elected to lead a more moderate coalition, which is confirmation that the austerity package will be implemented. Greek debt had already been rescheduled. Average debt maturity before the recent bailout was 16 years, and the latest package will push that out further still. Greece pays no interest on loans from the European Stability Mechanism until 2022.
Consequently, Greece’s interest payments to GDP are around the same as France and the lowest in the periphery despite having the highest debt to GDP.
It is a trite and over-used fund managers’ phrase to say that it is a stock pickers market but the divergence of performance between stocks and sectors is currently the highest in recent years. It is the stocks you are in, rather than whether you are in stock, that is the key determinant of one’s investment success.
