As macro and credit fundamentals improve, political clout and monetary policy concerns linger
At Invesco Fixed Income, we’re optimistic about the gradual improvement in Indian macro and credit fundamentals. However, we note a few concerns from our recent trip that warrant monitoring over the medium term, specifically:
- Prime Minster Narendra Modi’s ability to capitalize on gradually dwindling political capital to win key state elections will be tested in 2015. Success in several hotly contested local elections will be crucial for gaining the legislative support needed to pass vital reforms, in our view.
- The capitalization of public-sector banks — aimed at meeting Basel III capital adequacy standards established by the Basel Committee on Banking Supervision — in an environment of continued asset quality deterioration may add to the country’s closely watched fiscal deficit.
- The impact of recent central bank interest rate cuts on the overall lending environment has so far, from our perspective, only minimally improved lending conditions or boosted the real economy.
High quality stocks may be poised to benefit
A focus on Earnings, Quality and Valuation (“EQV”) is at the core of our Invesco International and Global Growth team’s investment philosophy and process. We believe our long-term, bottom-up, stock-picking approach can reward investors in uncertain environments — and right now, there are few issues more uncertain than the future of Greece.
On June 26, the Greek government made a surprise announcement that they were pulling out of negotiations with creditors and holding a referendum on Sunday, July 5 to vote on the most recent proposal of their creditors. In addition, capital controls were implemented on June 29. These could have unintended and direct consequences for the Greek economy — but they could also persuade the Greek electorate to accept their creditors’ proposal as they witness the incremental and immediate pain such measures inflict on the Greek economy and its citizens. The only certainty is that uncertainty is high with clear implications for volatility.Read More
The eurozone’s flaws have reached a critical stage as Greek banks are forced to close
The fortunes, or misfortunes, of Greece continue to bedevil the countries of the eurozone monetary union, and the fundamental flaws at the heart of the eurozone’s design are again clear for all to see: Without a political union to underwrite a federal eurozone and its banks, or member states and their banking systems, the current monetary union will be vulnerable to recurrent crises. The time has come for the euro-area’s leaders to face up to the decision: Either accept Greece’s default and exit from the euro (a Grexit), or create a political union that is financially strong enough to underwrite the debt of any entity within it — federal, state, bank or other.Read More
Contrarian investing provides opportunity to access the market’s ‘hidden gems’
An approach that is zealously employed by some of the world’s most legendary investors, contrarian investing is a disciplined investment approach that systematically acquires assets that are performing poorly and sells assets when they perform well. A contrarian believes that the stock market consistently overvalues the prospects of highly regarded companies, and undervalues those with outlooks perceived to be less attractive. Simply put, a contrarian investor believes that the crowd gets it wrong most of the time, and that a herd mentality can lead to mispricing that can be exploited in the securities markets.Read More
Improved monetary and fiscal conditions reduce contagion risk
General consensus is that the Federal Reserve (Fed) will hike interest rates in September or thereafter — the first US rate hike in more than a decade. It’s no surprise investors are concerned about whether it will cause a replay of 2013’s “taper tantrum,” the dramatic sell-off in so-called risk assets that hit emerging markets particularly hard when the Fed announced it would begin scaling back its quantitative easing (QE) program. In our view, Asia is now at less risk of a similar reaction.Read More
What to consider and what to be wary of when rates head north
US employers added 280,000 jobs in May – the largest hiring gain since December. This encouraging report from the US Labor Department, coupled with stronger-than-expected gains in hourly earnings, has renewed expectations for tighter monetary policy over the coming year. The Federal Reserve has been forthcoming about the need to normalize monetary policy, and investors are now preparing for higher interest rates.
This begs the question of where money will flow in the second half of 2015. A look at the historical performance of sectors within the S&P 500 Index is no guarantee of future results, but does provide interesting clues.Read More