We believe that global equity markets will be subject to increased volatility during the remainder of 2015 and that complacency levels remain too high, ignoring downside risks relating to increased geopolitical events (Grexit), increasing social unrest, lower commodity prices and expectations for future earnings growth that are too high given profit margins that are overly extended.
The recent bubble in Chinese markets that is now in the process of bursting may have more far reaching impacts than is currently priced in by global asset prices.
Entering the Q2 earnings season, we do see an increased risk of disappointment for US companies in terms of corporate results and their respective outlooks given the strengthening of the dollar and the impact of lower commodity prices. In Europe, economic data has been solid entering the reporting season and a weakening euro should have a positive impact.
European equities significantly outperformed US equities during the first half of the year but this outperformance may unwind should the situation in Greece deteriorate further, leading the greater than anticipated contagion.
We have called for dollar strength in recent quarters but when set against the euro, this trade largely appears to have run its course and has stabilised within a few cents of the current level over the past month, a range that may persist.
Corporate cash return strategies should be a continuing theme for 2015. In addition to dividends and share buybacks, the increase in M&A activity that was present in healthcare during 2014 is expected to continue and we believe there will be an increase in energy and commodity company deal flow towards the end of the year.
Our preference is for stocks which have proven business models, strong balance sheets, excellent management teams and trade on valuation metrics that are at a discount to the market despite holding stronger profitability growth profiles. We have continued to reduce our exposure to more cyclical companies as we believe there is an increased likelihood of a broad market correction over the coming quarters.
Top long stock picks for Q3 are: ACS, AstraZeneca, General Electric, Imperial Tobacco, Johnson & Johnson, Molson Coors, Munich-Re, Publicis, Union Pacific, Walmart.
In summary, we expect increased market volatility in Q3 as the degree to which equity markets rely on central banks for buoyancy will continue to assert itself. Valuation multiples that are currently at elevated levels, notably in the U.S and increasingly in Europe, will make it more difficult for equity markets to make and maintain new highs in the near term and that the risk of a material move lower of global stock markets is increasing. However, we believe our stock selections will continue to outperform in this environment.
David Holohan –Head Of Research
“Buy” = In excess of 10% of current price quoted in relevant article.
“Hold” = 0% to 10% of current price quoted in relevant article.
“Sell” = below 0% from current price quoted in relevant article.
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