A most welcome market sell-off

The correction year to date has begun to improve the risk/reward ratio for many stocks

A most welcome market sell-off

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.

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Will volatility break the Hong Kong-US dollar link?

Invesco’s chief economist answers frequently asked questions about the recent HKD depreciation

Will volatility break the Hong Kong-US dollar link?

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?

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Why high yield defaults may be heading higher

‘Strategic bankruptcies’ may accelerate the default process

Why high yield defaults may be heading higher

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:

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Volatility in Europe may reveal new investment opportunities in 2016

European fundamentals remain fairly steady, but political and economic issues warrant caution

Volatility in Europe may reveal new investment opportunities in 2016

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.

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Invesco Equally-Weighted S&P 500 Fund: Tapping into the full potential of 500 US stocks

Part of Invesco’s High-Conviction Investing Series

Invesco Equally-Weighted S&P 500 Fund: Tapping into the full potential of 500 US stocks

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.

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Three ways to become a goal-oriented investor

It’s easy to settle for average. But in just a few steps, you can tailor your investment strategy to your goals.

Three ways to become a goal-oriented investor

When you set a goal, are you hoping to achieve that goal? Or simply to make an average effort? Of course you want to meet your goals. Yet in investing, many people measure success against average market benchmarks, which may or may not help you meet your financial goals. Below, I discuss three ways to help you invest with your goals — not benchmarks — in mind.

1. Find your recipe

Our family kitchen boasts a variety of cookbooks for different cuisines, including American, Italian and French. Whatever their origin, the recipes require a mix of ingredients that, when combined and sequenced properly, result in a delicious outcome. But it’s also important to account for personal taste. For example, our son likes hot sauce on his scrambled eggs, while my wife and I prefer just a little salt and pepper. All three of us are getting protein, but his comes with a greater chance of heartburn, in our opinion. On the other hand, he thinks we’re boring.

Likewise, a properly designed portfolio has a variety of ingredients, which can be tailored to suit individual tastes. As I explained in my previous blog, “Endowment empowerment” for your portfolio, the basic ingredients for creating highly diversified portfolios include:

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Beyond the headlines: Our three ‘D’s’ help put recent emerging market volatility into perspective

We highlight our expectations for emerging markets from a fundamental and market standpoint

Beyond the headlines: Our three ‘D’s’ help put recent emerging market volatility into perspective

Over the last few years, emerging markets (EM) have been marked by considerable volatility. Much of the anxiety over the emerging markets has been attributed to rising rates in the US, a surge of capital outflows and concerns relating to external debt following the “taper tantrum” of 2013. Recent declines in oil prices and China-related uncertainties have only served to exacerbate these concerns.

However, Invesco Fixed Income has a different view about what exactly ails emerging markets. We believe the emerging markets are going through a very painful and very disruptive macroeconomic adjustment. This adjustment is needed to address underlying domestic and external imbalances. Such imbalances have been generated through a period of arguably excessive private sector credit growth that fueled private consumption (or in some cases investment), strong economic activity, and with that — a steady deterioration in underlying competitiveness and a rise in underlying indebtedness.

So how do we think about EM prospects going forward? Our outlook can be best understood through the context of three D’s: divergence, disruption – but no disaster.

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High yield: Drilling through the data on metals and mining bonds

We examine the performance, fundamentals and opportunities for the recently woeful sector

High yield: Drilling through the data on metals and mining bonds

An unhealthy dependence on easy capital over the past several years has created a major challenge for the metals and mining sector. Invesco Fixed Income (IFI) believes the mixture of high leverage and slowing demand for commodities is proving to be a lethal combination that warrants continued close attention in 2016.

Cautious on metals and mining after a difficult year

Last year was very difficult for high yield investors, especially those with exposure to metals and mining. For example, the metals and mining sector was the worst high yield performer of the year, with total returns of -27.94% versus -4.99% for the broader high yield market.1 The US investment grade metals and mining sector also weakened, declining by 14.51% and significantly underperforming the broader Barclays US Credit Index, which was down by only 0.77%.2

In our view, the metals and mining sector remains vulnerable this year as well, as Chinese demand continues to slow due to a shift away from fixed asset spending. At the same time, after years of global investment in capacity expansion, which was mostly debt-funded, the supply of most commodities continues to surge, depressing commodity prices. Against this backdrop, we believe investors need to approach the metals and mining sector with caution. We favor participating only in companies with the balance sheet strength and cash liquidity necessary to survive the downturn.

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Oil stocks: Is bad news signaling good opportunities?

For deep value managers with long holding periods, now is the time to find healthy companies that can weather today’s low prices

Oil stocks: Is bad news signaling good opportunities?

As a deep value manager with a long time horizon, I often see opportunities in the midst of gloomy headlines. While crude oil hit a new 12-year low of around $26 a barrel in January1, I view this sector as one of my top long-term opportunities.

That’s not to say the road ahead will be smooth, however. I believe that over the next six months or so, we’ll likely see some bankruptcies hit the oil patch — especially among smaller companies. But in my view, that’s a healthy development that will allow companies with strong balance sheets to pick up good assets at fire-sale prices.

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‘White-knuckle’ investing during volatility: Lesson learned from the Great Recession

Part 3: How a ‘stra-tactical’ approach can help investors stay ready for change

‘White-knuckle’ investing during volatility: Lesson learned from the Great Recession

This series uses historical economic snapshots to explore how a “stra-tactical” investment approach that combines strategic and tactical allocations can help investors manage volatility. This final blog looks at flows into equity and fixed income markets since the Great Recession. The first blog looked at the bond-unfriendly period during the 1950s and early 1960s, while Part 2 examined the bull equity markets of the 1980s and 1990s.

It’s a market truism that investors are prone to making the wrong decision at the wrong time, thus subjecting themselves to a white-knuckle ride that churns both portfolios and stomachs. When you follow the money, that certainly appears to have been the case after the Great Recession.

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