Understanding Market Volatility
In the first of two videos, George Maris, Co-Head of Equities – Americas, discusses fundamental reasons for the return of market volatility and the potential opportunities created for bottom-up investors.
- Although volatility has surged in recent months, today’s market swings are in line with long-term averages for equity markets.
- Helping drive the ups and downs are fundamental factors, including worries over trade wars, a risk-averse investor base and the end of quantitative easing in the U.S. and Europe.
- In turn, valuations have compressed across markets, making it possible to find high-quality firms – whose multiples only a few months ago may have been at lofty heights – trading at attractive valuations, in our opinion.
George Maris: The volatility we’re experiencing now is normal and totally in line with long term averages. The recent spike in vol. is a change over the last, let’s say year and a half. But it’s not a change over the last 10 years and it’s certainly not a change over the last 20 or 50 or 100 years.
There’s a couple of different factors that I think are responsible for the spike in volatility. The fundamental ones are all about the potential for a global recession. Those look likely to be coming from a policy mistake from somewhere because the underlying microeconomics are good around the world. Corporates are well-funded, businesses have healthy margins, there’s not a lot of excess that we’re seeing from a bottom-up perspective. But there’s some worries, particularly with respect to the trade war. When the Trump administration took a very aggressive stance with respect to trade, that really did throw sand in the gears of markets. And the reason for that is trade wars are, by definition, stagflationary: it causes inflation and reduces growth. That is the worst environment for an economy and a terrible environment in which to invest.
That coupled with some of the pull back from central bank policies. There’s been quantitative tightening happening both here and in Europe, and our rates rising. And, while those [rate hikes] had been fine for, let’s say the beginning part of 2018, those moves, coupled with the trade war rhetoric, really does spook the markets. Right, because I think the markets feel like policymakers aren’t paying attention to potential fragilities in the market. And you still have an investor-base that still has 2008 firmly in its mind. You also have a demographic issue, where we’ve got a greater proportion of folks that are aging around the world; they’re going to be more risk-averse and they’re going to be less willing to take negative news and potential economic weakness.
An opportunity that I think has presented itself, is with the highly correlated nature of equities being sold off, you’ve had a tremendous opportunity to differentiate as an investor among assets that you can aquire. And what’s interesting is, we’ve seen this across the spectrum of both value and growth. So, a lot of value type of stocks have been really punished through this period of time, given their economic cyclicality and they’re gearing toward interest rates. At the same time, a lot of really tremendous secular growth stocks have also gotten punished because of fears over valuation or worries over political interference.
The technology space, there’s some tremendous opportunities. At the same token, you’ve got materials stocks selling at double-digit free-cash-flow yields with super solid balance sheets and great supply-demand environments in their commodities. So everything from deep value commodities…commodity stocks to great secular growth companies, are all trading at what I think are very attractive prices versus their long-term intrinsic values.
The dislocation we’ve seen here in the US, has actually been exacerbated when you get out of the United States. Certainly, the dislocation you’ve seen in several emerging markets economies, including China, has been dramatic. In fact, the Chinese equity market under-performed Turkey’s equity market last year. And it’s not like things were awesome in Turkey last year. So we’re seeing on a bottom-up basis, tremendous opportunities everywhere. Remember, there are great companies located all over the world that sell into multiple markets all over the world. We think about things holistically, from a regional perspective, and those opportunities are ever-present and so we’re trying to take advantage of those in a prudent manner.
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