While valuations are improving in certain areas, challenges persist across the region
Virtually all Asia Pacific countries and sectors are experiencing negative earnings revisions, with return on capital falling to decade lows, a weak export environment and lackluster domestic economies. In this environment, investors have sought the highest-growth and highest-quality companies irrespective of valuation. Because the Invesco International and Global Growth team is not willing to buy at any price, we have been priced out of many of businesses we believe are attractive. But we see signs that this is starting to turn in certain areas.
At less than 13x price-to-earnings (P/E), Asia valuations appear reasonable, but this doesn’t tell the whole story. Asia has been a bifurcated market, with lower-quality/lower-growth stocks getting cheaper, and higher-quality/higher-growth stocks getting more expensive. More recently, however, this trend has started to turn, and a greater number of high-quality businesses are approaching levels that warrant our interest. We’re eyeing more companies today than we have in quite a while.Read More
Explore three strategies that may help investors reduce volatility in their portfolios
I discussed in a recent blog post how it might be prudent for investors to brace for the normalization of equity returns and risk – that is, when equity returns decline from recently high levels, risk increases from recently low levels, and they both perform more in line with their long-term historical averages.
Right after that blog posted, we experienced a sharp equity sell-off and a spike in volatility.
As the equity market normalizes, I believe alternative investments can be helpful to investors. That’s because alternatives have a history of outperforming equities during periods of stock market weakness, as the chart below demonstrates.Read More
The UK reconsiders its membership in the European Union
The United Kingdom’s (UK) Prime Minister, David Cameron, has promised to hold a referendum by 2017 to decide whether the UK will remain in the European Union (EU). What has brought the UK to this point and what are the major arguments for and against EU membership?
- Against EU. EU membership has long been a political issue in the UK and was a key campaign issue in the 2015 general election. Those who argue against membership focus on issues of immigration, its strain on the UK’s social infrastructure, the high financial cost of EU membership, and limits on the UK’s ability to forge trade agreements with non-EU nations independently of the EU.
- For EU. Proponents of EU membership point to the ease of trade and travel within the EU — i.e., no tariffs or immigration restrictions. Proponents argue that a British exit from the EU, a “Brexit,” could usher in significant political and economic uncertainty, potentially thwarting growth and threatening the status of the UK as a major financial center.
Recent polls show that the vote is likely to be close. Ahead of the vote, Prime Minister Cameron is seeking to renegotiate the terms of the UK’s membership in the EU. Talks are ongoing and major discussions are set to take place during the EU Summit Feb. 18 and 19. More palatable terms of membership could convince undecided voters that continued EU membership is the best way forward for the UK.
Invesco Fixed Income’s (IFI) viewRead More
Our strategy has been underweight in the energy sector, but we’re exploring for opportunity
Historically, the Invesco International and Global Growth team has taken an underweight position in the energy sector because we believe that over the course of an economic cycle, few oil and gas producers can consistently earn above their cost of capital. Additionally, we see many management teams prioritize volume growth over returns — a strategy that eventually pushes prices down to or below the median break-even cost curve. But after the recent carnage in the oil markets, we are beginning to dust off some of our energy company files in search of opportunities.
A focus on quality will be critical to finding companies that can survive — and thrive — in this space. The majority of energy companies are not able to tap the markets for new debt, and that means more dividend cuts, high-cost equity dilution or high-quality asset disposals are their only options. We expect to see several bankruptcies in 2016
Our view of oilRead More
Low volatility investors could benefit if the Fed opts to further tighten monetary policy and reduce its balance sheet
As the nation’s central bank, the Federal Reserve (the Fed) seeks to maximize employment, maintain price stability and keep long-term interest rates at moderate levels. To achieve these monetary goals, the Fed employs a variety of tools – the most common of which are “open market operations.” Historically, the changing pace of these operations has had an effect on equity market volatility. I believe that exploring this relationship can provide insights to investors — especially those considering low volatility strategies.
What are open market operations?Read More
The correction year to date has begun to improve the risk/reward ratio for many stocks
The indiscriminate sell-off through the late fourth quarter of 2015 and into 2016 is exactly the type of environment the Invesco International and Global Growth team has been waiting for. While the correction year to date has begun to improve the risk/reward ratio for many stocks, it’s important to recognize that share price declines have in many instances largely tracked earnings estimates lower. We’ve yet to see risk premiums rise to adequate levels in the higher- quality areas of the market we prefer, but our research watch list of stocks approaching buy levels is growing.
Understanding global market drivers
Collectively, there was more negative than positive for markets to absorb, leading to declining equity prices during the fourth quarter of 2015 and a more dramatic step down in the first weeks of 2016.Read More
Invesco’s chief economist answers frequently asked questions about the recent HKD depreciation
On Jan. 20, the Hong Kong dollar (HKD) fell to eight-year lows against the US dollar (USD), at HK$7.8295.1 Although it later gained back ground, the volatility prompted questions about the viability of the currency’s long-standing peg against the USD. Below, I answer some frequently asked questions about the recent depreciation and its implications.
How are the HKD and USD related?
In 1983, Hong Kong’s Currency Board system pegged the HKD to the USD at a rate of HK$7.8 to US$1. In later years, the peg was adjusted to a band of 7.75 to 7.85.1
What has triggered the shift in the exchange rate?Read More
‘Strategic bankruptcies’ may accelerate the default process
Many market participants focus on default rates as an indicator of underlying health in the high yield market. In recent years, overall default activity has been below longer-term averages. Invesco Fixed Income’s High Yield team, however, believes that’s going to change in 2016. We see stress in several industries, most notably energy and metals and mining. We believe this stress will lead to a material increase in high yield defaults, likely into the 5% to 6% range. In our opinion, the majority of default activity will center on the aforementioned troubled sectors.
How ‘strategic bankruptcies’ may change the default picture
One reason we’ve increased our default expectations is our belief that a number of troubled companies have adopted a new way of think about filing for a formal bankruptcy. We think we are about to see a new trend where company management teams will debate the merits of a so-called “pre-emptive default” or “strategic bankruptcy.” What’s interesting about this process is that many stressed companies today may have 12 to 18 months of liquidity on hand, yet they may decide to file for Chapter 11 protection much sooner than some market participants had expected.
There are many moving parts and endless “what-if” questions to evaluate, but the process works as follows:Read More
European fundamentals remain fairly steady, but political and economic issues warrant caution
The end of 2015 didn’t bring any dramatic changes to European fundamentals. However, there have been some subtle shifts that the Invesco International and Global Growth team is keeping an eye on in 2016. While our strategy did not initiate any new positions in Europe during the fourth quarter, recent volatility has brought some of our “watch list” names closer to the point where we would add them to the portfolio.
The long-term economic impact of Germany’s migrants remains unclear
There is some uncertainty as to how the influx of 1 million migrants will affect Germany, both politically and economically. Politically Chancellor Angela Merkel’s popularity, which had been stable for years at 70%, has fallen to around 50%1 as there are fears the migration crisis and terrorist threat are tied together. The market will be concerned if there is any indication she might not win another term. She has a year and a half to fix the problem before the next national elections.
Economically, the influx of migrants should act as a short-term tailwind to gross domestic product (GDP), potentially to the tune of a 0.5% increase. However, the medium- and long-term effects are less clear and will depend on how quickly they can be integrated into German society. Elsewhere on the economic front, we have seen sectors such as autos and engineering companies tumble on export concerns, as Germany has the highest exposure to China among European countries.Read More
Part of Invesco’s High-Conviction Investing Series
Many investors assume that the best way to get broad exposure to the US stock market is through an S&P 500 Index fund — but they might be surprised to know that this index’s performance is disproportionally dominated by its largest names. I have high conviction that there’s an alternative way to tap into the potential of all of the S&P 500 stocks — it’s called equal weighting.Read More