In the first half of the year, market indices have posted record highs, geopolitical unrest has dominated the headlines, the occasional banking crisis and increased regulation have competed for column inches, but little has seemed to move the needle on market volatility. This phenomenon appears to be a reflection of the relative stability of the global economy. Growth may be slow but it continues to be resilient, making for a benign macroeconomic backdrop.
This, in turn, is proving supportive for corporate confidence and is feeding through into a resurgence in M&A activity.
The recent surge in M&A announcements underscores a growing willingness on the part of corporates to finally deploy their cash-rich balance sheets. A favourable debt financing environment, low interest rates and good credit availability for leveraged buyouts is proving positive for equity holders of companies engaging in sensible strategic deals.
This is highlighted in the positive share price moves across both acquirer and target stocks and, upon consideration, may be a better outcome than companies overspending on capital expenditure.
I expect this momentum in deal activity to continue through the rest of the year, as the value of M&A transactions remains low relative to history if evaluated on a percentage of market capitalisation basis. This should create interesting stock specific investment opportunities.
On a regional basis, while the US economy had a false start in 2014 due to bad weather, this should reverse in due course. We have seen continued gains in employment, and although housing has not seen the linear improvement that many expected, the recovery continues.
In fact, investors are now increasingly beginning to factor in interest rate increases and we could see an interest rate increase after tapering ends in the fourth quarter.
At a time when inflationary forces are muted, an interest rate increase will underscore the Federal Reserve’s belief in the strength of the recovery and should not necessarily be considered a risk to growth or stock market performance.
Many investors are becoming increasingly watchful of the strong stock market gains but, so far, US stocks are not looking too expensive relative to history in price earnings terms.
Performance of index over 5yrs
Source: FE Analytics
While the European economy has no doubt stabilised and there are signs of improved borrowing activity, I believe the compression in peripheral bond yields has largely run its course. Some investors may be getting somewhat complacent about Europe.
As far as Japan is concerned, investor expectations from the government’s reform agenda, and more specifically the ‘Third Arrow of Abenomics,’ are now quite subdued. Japanese stocks have lagged the global average despite company earnings revisions surpassing those in many other regions and valuations look attractive.
Elsewhere, emerging markets present a mixed picture in terms of fundamentals but offer more value opportunities as a whole. Against a backdrop of some uncertainty, it is important to be stock specific.
From a sector point of view, I believe those areas of the market benefiting from emerging innovation should attract capital flows and perform well in an environment where earnings growth is less easy to find.
Healthcare, which until very recently was shunned by investors because of widespread patent expiries and regulatory concerns, has begun to look interesting from a growth standpoint.
The information technology sector, which is seeing the realisation of many of the commercial opportunities envisaged in the internet space years before, also remains promising from this perspective.
Notwithstanding my regional and sectoral views, I remain very much focused on finding bottom-up stock ideas.
In particular, I am on the lookout for businesses that offer exceptional value, those that stand to benefit from corporate change as well as those which dominate their respective niche and enjoy a sustainable advantage over their competitors.
FE Alpha Manager Jeremy Podger took over the now £1.5bn Fidelity Global Special Situations in March 2012, having previously run global portfolios at Investec and Threadneedle.
According to FE Analytics, his fund has been a top quartile performer in the IMA Global sector over that time with returns of 35.03 per cent, beating its benchmark – the MSCI AC World index – by 5 percentage points.
Performance of fund vs sector and index since March 2012
Source: FE Analytics
Fidelity Global Special Situations has an ongoing charges figure (OCF) of 1.17 per cent.
