On Aug. 21, the Dow Jones Industrial Average entered a correction — falling 10% from its most recent peak — and reminded investors what volatility looks like after almost four correction-free years.
While volatility exposes weaknesses in the market, in my opinion it also reveals the strength of high conviction managers who are skillfully navigating the market. Active management and smart beta strategies seek to surpass the “market averages” offered by traditional benchmarks — providing the potential not only for higher returns, but also for a smoother ride.
At Invesco, that’s what we seek to do for investors: Offer high conviction strategies that help people navigate volatility and achieve their financial goals.
Here, I’ve gathered opinions from several of our senior investment leaders across equities, fixed income and alternatives, discussing their view of market volatility and how it affects — or doesn’t affect — the opportunities they see.
Rob Waldner, Chief Strategist and Head of Multi-Sector, Invesco Fixed Income
China’s central bank cut key policy interest rates Aug. 24 to help calm markets after its recent currency devaluation set in motion a cascade of Chinese and global stock market turmoil. There may be some speculation that these changes to monetary policy may be the start of a form of quantitative easing (QE), however, we at Invesco Fixed Income do not view the People’s Bank of China’s (PBoC) latest moves as a broad monetary program along the lines of QE. While QE would be aimed at “getting ahead” of economic slowdown and deflation, we believe the Chinese authorities appear to be merely treading water, injecting sufficient liquidity to replace lost liquidity due to recent currency interventions. In other words, the authorities appear to be responding to recent market movements, but not more.
The unintended consequence of the foreign exchange regime shift in China to a dirty float from a peg is requiring the PBoC to sell US dollars on a very large scale. Most evidence points to large, steady capital outflows from China since the currency regime change that has forced the authorities to intervene in the foreign exchange market to prevent weakening of the currency. The mechanical reality of this policy is that China needs to raise US dollars via US Treasury sales in roughly the same magnitude as their currency intervention activity. We believe the PBoC has been selling US Treasuries to support this intervention, and that this has been one of the drivers of Treasury price action in recent days. US Treasuries over the course of the past few days have not rallied materially in the face of equity weakness and, in fact, have traded with a persistent higher yield bias.
We see no immediate end to the capital flows out of China and anticipate that the Chinese authorities will continue to intervene in the near term to support their currency. This should keep upward pressure on US Treasury yields in the near term.
We remain cautious on emerging markets, particularly Asian currencies and credits. The position-driven movements in global markets since the renminbi devaluation in August have created attractive opportunities in some markets where the fundamentals are positive but corrections have driven spreads higher. Invesco Fixed Income favors domestically focused US investment grade and high yield securities. Spreads are attractive and the fundamentals of the US economy remain solid, in our view.
Clas Olsson, Chief Investment Officer, Invesco International and Global Growth Equities
Explaining the market’s recent action is not central to our process, which is focused on identifying the most attractive companies from an earnings, quality and valuation perspective. That said, monetary and fiscal stimulus by Europe, Japan and China in the past three quarters seems to have fuelled expectations that growth would accelerate in the second half of 2015 and into 2016.
While Europe and Japan have seen some economic benefits from these policies, their better growth has been primarily driven by a weaker euro and yen. While the euro and yen have become more competitive, the yuan (due to its peg to the US dollar) has become less competitive. Despite efforts by the Chinese government to stimulate growth, their economy has continued to slow.
Future global growth expectations appear to be in a process of resetting, leading to higher volatility. We would not be surprised to see higher volatility sustained until the market digests lower global growth expectations.
As disconcerting as volatility may be, we believe it tends to create long-term opportunities for our shareholders. It’s rare to find a thriving business at a compelling valuation when everything is going right; those valuations typically occur when fear dominates the market. On a stock-by-stock basis, we see this recent decline as a buying opportunity. From a regional perspective, our process is finding more opportunities within Asia and Latin America as we have seen an indiscriminate sell off in emerging markets. From a sector perspective, we are finding more ideas within consumer staples, health care and some quality cyclicals such as technology and industrials.
We don’t try to predict macro environments, but as active managers who seek to consistently take advantage of volatility in the markets, we welcome the increased volatility as it is generally favorable for our quality growth style and as it expands our opportunity set.
Juliet Ellis, Chief Investment Officer of Invesco US Growth Equities
The current sell-off has been driven by both technicals and fundamentals — and it can become circular.
From a fundamental perspective, actions taken in China demonstrate that despite published economic data, officials in China are concerned about the risk of a hard landing. If currency devaluation spreads to other countries, the risk of default rises and sentiment moves to risk-off. From a technical perspective, the market is and has been “uneasy” with the uncertainty around the Federal Reserve’s strategy and pace for raising rates in the very near future, making it vulnerable to a sell-off. The US small and large-cap markets have been rising steadily since late 2014 with only minor pull-backs, so a correction seems reasonable.
My team thinks a buying opportunity is developing, but we’re reluctant to call a specific bottom. As this correction has pulled the markets to a flattish return, we could be setting up for a healthy fourth-quarter rally. In terms of industries, we think restaurants, software and health care equipment and services are attractive. We would not be buyers of biotech due to valuation concerns even after this pullback.
We continue to expect the US economic cycle to steadily progress into 2016 driven by improved housing, high consumer confidence and better employment. We do not think a US recession is likely.