In equity markets, the descent can be more hazardous than the ascent

A correction at the end of January has ushered in a period of relatively heightened volatility through 2018, as markets have come to focus more on potential headwinds and attention has started to swing away from growth-orientated stocks, to ones with more defensive qualities, better able to operate through more challenging market-cycle conditions. In our view, while markets have regained some poise over recent weeks, further market falls are possible against the volatile backdrop. Is it best to keep chasing momentum and growth or to hunker down and invest in companies with more defensive qualities?

In attempting to answer this question, it is informative to look at 40 years of data from the S&P 500 index of US equities and the asymmetry between the effect of falling markets and rising markets on investors’ overall returns. Put simply, it has been far better for investors to miss out on the 10 worst market days over the past four decades, than to have missed out on the 10 best days.

To draw on a mountaineering analogy, many more climbers die on the way down from the summit than on the way up. Much of this could be down to the fact that a climber will use up the majority of their resources on the way up, and will be more tired physically and mentally on the descent when many of their supplies have been exhausted.

Similarly, the asset inflation driven by loose central-bank monetary policy and the abundance of cheap debt has helped propel markets to historic highs, but as resources are increasingly withdrawn, there is far less left in the tank to sustain the markets’ upward trajectory.

To us, using the mountaineering analogy again, the message seems clear: it is more important to acclimatise, prepare properly and manage resources prudently to boost your chances of surviving the descent. In the case of equity markets, we think one way to achieve this could be to invest in companies with strong balance sheets and visible, recurring cash flows that can be captured in the form of dividend income, to help augment returns when markets are volatile or on their way down.

Nick Clay – portfolio manager, Newton Investment Management.

A correction at the end of January has ushered in a period of relatively heightened volatility through 2018, as markets have come to focus more on potential headwinds and attention has started to swing away from growth-orientated stocks, to ones with more defensive qualities, better able to operate through more challenging market-cycle conditions. In our view, while markets have regained … read more

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Roll out the barrel: positive signs ahead for global beer brewers?

The beer market is highly concentrated with the top five brewers producing about 50% of global volumes and controlling 65% of industry profits.  Volume growth has slowed and has been broadly flat in recent years due to both macro and more structural issues.  A recovery in emerging markets where per capita consumption of beer is still relatively low should see the category back to growth, but more structural volume headwinds particularly in developed markets persist.  In many developed markets demographics are less favourable, per capita consumption is mature and younger generations of consumers are drinking less alcohol than their parents and grandparents.  However, it is not all doom and gloom in developed markets.  While volume growth has stagnated, consumers aspire to “drink better” trading up to more expensive craft beers, low/no alcohol beers and flavoured malt beverages.  Emerging markets have also seen increasing demand for premium products, and the roll out of higher-priced global brands has accelerated.   Premiumisation in both developed and emerging markets has driven category value higher even as volume has remained stable.

Paul Flood – multi-asset manager, Newton Investment Management

The beer market is highly concentrated with the top five brewers producing about 50% of global volumes and controlling 65% of industry profits.  Volume growth has slowed and has been broadly flat in recent years due to both macro and more structural issues.  A recovery in emerging markets where per capita consumption of beer is still relatively low should see … read more

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Japan: Bridging the productivity gap

As Japanese society ages it will need to rely ever more on automation and new technology to bridge the productivity gap. That creates a requirement for robots to start taking on the jobs that people used to do. Employment data and labour force projections underline the point.

The Japanese jobs-to applicants ratio has soared while the unemployment rate has plummeted as the economy recovers from 20 years of stagnation and deflation during which the nominal GDP actually contracted.

Meanwhile, even though more women are entering the workforce, the number of people in work will plateau at best in the next decade. Together, the combination of a tight labour market and the structural trend of an ageing population create a real need for an automated future.

Miyuki Kashima – head of Japanese equity investments. BNY Mellon Japan

As Japanese society ages it will need to rely ever more on automation and new technology to bridge the productivity gap. That creates a requirement for robots to start taking on the jobs that people used to do. Employment data and labour force projections underline the point. The Japanese jobs-to applicants ratio has soared while the unemployment rate has plummeted … read more

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