Monthly video update – March 2018

Mark Whitehead looks at the long-anticipated burst of volatility that led to February’s market sell off, but sees no reason to believe recent volatility is a sign of a move towards recession.

21 March 2018

Securities Trust of Scotland Monthly update - March 2018 Play Play Video
Mark Whitehead with an update on Securities Trust - March 2018

What caught your eye this month?

  • The long-anticipated burst of volatility finally occurred at the turn of the month and the market has remained cautious since the initial sell off.
  • The cause has been attributed to the rise in bond yields, particularly in the US, where the 10-Year Treasury moved up sharply: reflecting an uptick in inflation due to strong economic growth.
  • The threat of higher inflation, driven by wage increases and rising input costs, will directly affect corporate margins and profitability. Also, a continued climb in rates will cause investors to dial up the discount rates they use to value future cash flows.

What currently interests you?

  • It has been interesting (if not a little painful) for income investors, to discover many defensive stocks led the market lower through the volatility.
  • This is highly unusual and could be due to the market viewing higher-yielding stocks as so-called ‘bond proxies’.
  • Another explanation is the forced selling of exchange traded products – ETFs – investing in lower volatility strategies. We believe this has led to dislocation, which should present some strong dividend-growth opportunities.

What is the outlook for the next few months?

  • We spend a lot of time analysing company balance sheets to make sure they are appropriate for the type of business a firm is undertaking.
  • This will become increasingly important as interest rates rise. Companies amassing high levels of cheap debt may well find the costs of replacing financial leverage punitive – which could adversely affect growth plans and even put pressure on dividends as they struggle to meet interest payments.
  • Looking wider, we see no reason to believe the recent volatility is a sign we are moving into recession. As the cycle continues, more economically sensitive sectors should continue to do well.
  • We still believe Europe offers an attractive valuation relative to North America – and from a sector-perspective also expect a rebound in some defensive areas which have been sold off aggressively in recent months.