Market volatility still creating investment opportunities
Global macro investing and hedging behaviour is having an increasingly significant impact on equity markets, according to Standard Life Investments.
According to Mikhail Zverev, head of global equities for Standard Life Investments, as more investors are favouring a risk-on/risk-off approach, there are valuable opportunities to be found for those willing to invest on an individual company basis.
“During periods of volatility, stock pickers can build positions in stocks they like for company specific reasons, at prices less reflective of their underlying fundamentals,” he said.
Zverev said the growth of exchange-traded funds (ETFs) to reposition portfolios or take broad sector or regional views had also contributed to the macro-driven behaviour of the market.
“Another strong trend has been the growth in global macro investing – driven both by the development of global macro hedge funds and absolute return products,” he said.
“These fund flows, as in the case with ETFs, contribute to the weight of money that trades stocks based on macro views.
“All of these factors are resulting in greater market correlations and market volatility,” Zverev said.
According to Zverev, in an environment where a greater proportion of market participants are overlooking stock specifics in favour of macro and sentiment drivers, returns available to stock pickers should be enhanced.
“For example, Australian-listed mining firm Iluka Resources belongs to the minerals sector, which performed poorly as the market shunned cyclical stocks in 2011,” he said.
“There were concerns about China’s economic slowdown, however Iluka’s stock-specific factors more than offset these sector headwinds.
“Changing supply/demand balance, increasing pricing and the company’s superior resource position resulted in a string of strong results and market updates which ultimately drove shares up 73 per cent on an absolute basis, substantially outperforming the MSCI World index,” continued Zverev.
“This demonstrates that even in macro-driven markets and in out-of-favour sectors, when companies deliver strong fundamentals the stockholder is rewarded.”
For Zverev, global equity as an asset class represents the biggest opportunity for stock selection.
“There are thousands of investable companies, with enormous diversity of business models and individual circumstances that should present plenty of opportunities,” he said.
“But consistently identifying and acting on those is a challenge.
“We believe good fundamental analysis requires a combination of scale and effective sharing of global investment insights, along with high quality company access,” Zverev added.
“Despite all its limitations, an in-depth conversation with the top management of a company, its customers, suppliers and competitors is still the best source of information for a stock picker.”
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