As Hillary Clinton prepares to battle Donald Trump in the forthcoming US presidential election, the world waits with bated breath to see whether Trump, one of the most polarising individuals to grace the world’s political stage in years will end up as leader of the free world.
It’s a nervy time.
Elsewhere – and not for completely mutually exclusive reasons – the stock market across the pond has also been somewhat skittish this past 12 months.
According to a recent investment note from BlackRock, the S&P 500 Index hit a record intraday high of 2,137 on May 21 last year, a peak not regained in the whole of the next 12 months.
Having lost 3.7% in dollar terms, but 2.2% in total return dollar terms indicates the importance of the value of dividends, according to the fund manager.
Adour Sarkissian, manager of the Sanlam Four US Dividend Income fund recognises a very different income landscape these days.
The Next Generation of Dividend Payers
In absolute terms, while dividends tend to generally be much higher in Europe and the UK than the US, the gap appears to be narrowing.
He said: “For example, technology has been a good sector for momentum in dividend growth in recent years and is a trend we have exploited. When I first started managing this strategy in 2007, there were few – if any – tech stocks paying dividends. Today there are a number of dividend-paying stocks in the US tech sector, with many yielding quite strongly.”
A more pressing issue for US investors, it seems, is the volatility witnessed in the past year, according to BlackRock.
The S&P has dipped more than 10% twice in the last year, last summer and more recently at the start of 2016.
Opportunities in Volatile Markets
As always, however, heightened volatility can present selective opportunities. Eric Papesh, a portfolio specialist at T. Rowe Price, who works across the triple-starred US Large Cap Value Equity and four-star US Smaller Companies Equity funds, believes the market weakness as we entered 2016 was excessive when compared to the underlying economic backdrop.
Amid macroeconomic concerns, investors have flocked into rather crowded areas. Against this backdrop Papesh and his team were able to take advantage of the volatility, boosting some of the high-conviction names in their portfolios.
“Given the market’s pullback, valuations have also become more attractive and we view current levels as ‘reasonable’ considering where we are in the economic cycle,” he said.
Volatility: The New Normal?
Having said all of that, it is worth reminding ourselves that while increased volatility can be more difficult to navigate, the environment needs to be viewed in the correct context; elevated volatility is, in fact, simply becoming “normalised”, according to Ian Heslop, of Old Mutual Global Investors, who runs the five-star, Bronze Rated North American Equity fund.
Heslop said the S&P 500 index trading at 8 or 9% (as was the case in 2013) is not normal.
“Equity volatility should be anywhere between 15% and 20%, so one of the things we have to be aware with this elevated volatility, is that it is actually normalising volatility.”
With central bank intervention, the Federal Reserve’s tapering of its quantitative easing programme last year is resulting in a pickup in volatility (greater liquidity through QE tends to result in lower volatility so the environment today is the natural unwinding of that). Heslop notes that the rates seen today are still in emergency policy mode, the fallout from the global financial crisis still working its way through the system.
“People are very good at remembering what has only just happened; thinking that low volatility is normal and therefore any move back towards where equity markets should be will be quite painful because people don’t necessarily remember how volatile equities can be.”
He also reminds investors not to get carried away believing that what is happening now is any more unpredictable than any other period in the past.
“The two big headwinds now are the forthcoming interest rate rise and political risk. But America always has political risk, every two-year cycle. It just feels particularly binary right now and you rarely expect price/earnings levels to rise in the face of such uncertainty.”
The Importance of a Defensive Strategy
So, we are in testing times, certainly, and diversified, defensive strategies that try and move away from style biases look to be the safest way to weather the storm.
Gavin Haynes, managing director at Whitechurch Securities said while valuations were still fairly unappealing, in terms of the volatility, the picture could be far worse.
“The past 12 months has been a difficult time for all equity markets. Relative to other global markets, the US has proven to be more resilient, which has surprised a lot of people – us included.”
After such a period of strong performance, valuations – compared both historically and against other markets – look expensive.
“Not only that, but earnings growth has all but evaporated. Earnings and price re-ratings are the two things that will drive markets upwards and now in the US it is difficult to see which of those will drive markets further forward.”
