August 2016

Global equities: a move from “min-vol” to “more vol” 

The world economic and political environment has shifted over the last few months, especially with Brexit, which brought a series of challenges to markets. Here is what the experts are saying about the latest direction in the investment trends in global markets.


The following article is provided by PineBridge Investments:

As investors shift portfolios to react to the change from “minimal volatility” to a “more volatility” approach, it is the US and Asia that hold the most promise for global equity investors.

The ultra-low or negative yields in fixed income, which we saw over the past year or two, have resulted in extreme positioning in minimum-volatility, or “min-vol,” equity strategies. We believe that while the fundamentals for global equities are now improving, the continuing macroeconomic headwinds, such as the recent Brexit referendum, has thrown a spanner in the works. 

The shock from the Brexit outcome could cause an extended period of economic and political uncertainty, with the UK as the epicentre. However, the domino effects in the European Union (EU) may be the more serious concern for equity investors.  This is why we believe swift political developments are more likely to happen than not in the UK, in order to limit economic fallout. The process of exiting the EU is untrodden, so there is a high bar to trigger it, and the publicised destruction of wealth that has followed the vote should condition the public mind. 

We have seen over the past month that bank stocks have logically suffered the brunt of the market selloff. The good news, however is that bank systems in the UK and the EU have been through regulatory stress tests with sufficient total loss-absorbing capital to limit contagion globally. 

Central banks to counter volatility

Central banks can provide liquidity and stand ready to counteract currency volatility. The US Federal Reserve, in particular, is keeping a close eye on a strengthening US dollar. There is about USD8.73 trillion of bonds that have negative yields. Min-vol strategies encompass more than high-dividend-yielding stocks and include high-quality companies with visible growth. The position of investors in these low-volatility stocks is heavily crowded and represents a rotational risk in equity markets in a regime change to a lower correlated market with greater stock return dispersion. This is mainly a result of improving fundamentals in the major economies, mainly in the US and China. 

The Brexit referendum has further prolonged the period of global macroeconomic uncertainty, but markets could stage a reversal to embrace the improvement in fundamentals. With crowding into min-vol at an extreme, we believe “more-vol” should be expected.

US and Asian markets show promise

In Europe, the surprising outcome of the Brexit referendum will increase the uncertainty in that region for some time to come. However, the dislocation in the equity markets may offer attractive investment opportunities in the coming months for investors. In many cases, our stock research is revealing that outlooks are stabilising after years of weakness, and this incremental improvement warrants attention.

We continue to focus on the US market, where a combination of rising consumer credit demand, a strong housing market and a pickup in industrial new order growth portends well for the domestic economy. However, we see asset prices trading close to historical highs, and as such, we believe investors should increasingly look to Asia for new investment ideas. Asian markets offer potential in many cases, with increased spending on infrastructure. This is one of the more significant tailwinds.

Japan offers opportunities

Policymakers in Japan are expected to keep pressing ahead, with stimulus in the form of both monetary and fiscal policies. Inflation expectations have improved since 2013, from deflation to price stability. We believe there is an opportunity to strive toward modest pricing power, with measured inflation of 2% as a target. We also see continued progress on the micro front, with tangible improvements in return on equity and shareholder prioritisation, albeit at a slightly slower pace.

In contrast, the re-pricing of Japanese equities has focused on the macro story and ignored this powerful return driver, making potential forward-looking returns, we believe, highly attractive for equity investors.

About PineBridge Investments: 

PineBridge Investments is a global asset manager with offerings that span the asset class and capital structure spectrum.

  • US $80.7 billion in assets under management (as of 30 June 2016)
  • Investment capabilities in multi-asset, fixed income, equities and alternatives
  • Global client base that includes institutions, insurance companies, intermediaries and individuals

Disclaimer:

  • The article above is provided for general information purposes only. It does not constitute a recommendation to pursue any investment strategy or take any other action.
  • All investments involve risk. Past performance is not indicative of future results. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.
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