Related: The Fed is About to Crash the Markets Again
Quality
There has been no change in the overall picture of quality around the world: In general, non-US companies boast better relative balance sheet strength versus US companies, which are more leveraged.
If interest rates continue to rise from still low levels, we believe it will be only a matter of time before equity market investors begin to pay more attention to balance sheets and interest coverage ratios — critical components of our quality assessment.
Even if rates do not rise, balance sheet strength will increasingly be in focus as changes to International Financial Reporting Standards disclosure (beginning Jan. 1, 2019) will require companies to include operating leases as part of their debt reporting, increasing leverage ratios and reducing return on assets in many instances.
Valuation
There has also been no change to the stretched nature of absolute valuations, particularly in the US, where the Shiller price-to-earnings ratio and the price-to-book ratio have only been higher during the tech bubble of the late 1990s.5 On a relative basis, price-to-earnings and price-to-cash-flow ratios favor companies outside of the US where the relative earnings leverage story remains compelling, in our view.
Key Takeaway
While markets change, our EQV philosophy and process remain the same. All of the strategies managed by the team focus on identifying high-quality companies that have sustainable growth and are trading at attractive valuation levels. We believe recent volatility has brought renewed focus to the importance of these traits among investors.
This article has been republished with permission from Invesco Powershares.