Beyond Politics, An Environment for Income Persists

 In Market and Investment Insights

With political wrangling roiling some expectations, Ben Lofthouse, Head of Global Equity Income, discusses its effect on various sectors and investing styles in a short video update. He interprets the impacts to dividend-paying stocks and where his team continues to see opportunity.

Key Takeaways

  • Following a strong start to the year on economic growth expectations, political noise temporarily unsettled investors and negatively impacted non-U.S. equities
  • Internet, social media and technology have been leading the market, along with growth and momentum investment styles
  • We believe this environment presents opportunities for stock selection, including within overseas equities and sectors continuing on a gradual path of dividend increases

More recently, there has been a little bit more of a risk-off field to markets. You know, after a strong start to the year on economic growth expectations, there have been a few political things in a number of different regions, both in emerging markets and within Europe, notably Italy, that I think have unsettled investors and have caused people to change their allocations for a while.

In this period, we have started to see some of the defensive areas that sold off earlier in the year on interest rate concerns, have started to perform a bit better, so we have seen a little bit of a change in leadership, but the consistent team is a very strong tech leadership. So still probably the area leading the market is very much that area of Internet, social media and technology.

There have been very strong style trends in the market. Growth and momentum are very much leading the market this year. They have significantly outperformed value and low volatility. The extent of that is quite significant, so when these types of gaps have appeared in the past, sometimes you do get a pullback, but certainly it has been a very strong period of factor outperformance from growth.

So recently with the kind of political concerns, we have seen overseas equities significantly underperforming U.S. equities. And we have seen somewhat of a home bias there. I think it provides an opportunity, because the sell-off in some cases has been quite indiscriminate, so both in defensive sectors earlier in the year sold off where for many countries rates aren’t going up, and then more recently some of the cyclical sectors have been sold off in sympathy with the overall kind of political concerns. So quite often we have seen periods like this provide quite a good opportunity for stock selection. So I think I would anticipate more divergence in overseas performance going forward from here, but certainly for the first five months of this year it has been quite a tough environment for investing outside the U.S. and income investing.

The positive of some of the trends this year, I guess, is that income sectors are looking very cheap and overseas equities are, again, looking very cheap. And I think from an income point of view, we haven’t really seen any deterioration in income generation, so sectors such as the oil sector and commodity sector has still been generating a lot of cash flow and that is leading to dividend growth and dividends being sustained. The financial services sector, the balance sheets in general are much stronger than they were a few years ago, so there the share prices might have fallen, the dividends are being paid. Then at the same time, you have got lots of other sectors just continuing with a gradual path of dividend increases.

So it is a good environment for income and certainly we haven’t seen any deterioration in income generation that maybe some of the market movements would suggest.

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