The ability to keep generating cash flow above cost of capital even during rough patches is a sign of stability in a company, says UBP’s Martin Moeller.
Market volatility has been easing in the last few weeks. But how should we interpret the sharp fluctuations we have seen throughout this spring? We asked Union Bancaire Privée’s (UBP) co-Head of Swiss & Global Equity Martin Moeller at UBP’s mid-May Investment Insight Summit in Zurich where he was a keynote speaker.
After a sharp rally in the first quarter, the main stock market indices then plummeted again between mid-April and mid-May. How do you explain this second slump this year and how do you factor it into your investment strategy?
It’s difficult to pinpoint one single cause for the downturn. As regards the situation in Ukraine, the Russian army’s partial retreat and concentration in the south-east of Ukraine is likely the least damaging scenario. It means fewer immediate risks of the conflict spreading to other countries than when the Russians were on Kiev’s doorstep.
“There was no single trigger for the downturn between late April and early May.”
As for oil prices, they’ve kept within a fairly stable range since the end of February and there’s less risk of overshooting than in early March. Of course, inflation remains high in many countries, but that’s no surprise either. The Federal Reserve showed its determination to fight price rises months ago and stopped using the word ‘transitory’ nearly half a year ago.
Meanwhile many of the first-quarter results published by large companies have beaten expectations. In some cases, forecasts for the rest of the year have even been revised up. Of course, not all companies have the same ability to adapt to energy and transport cost increases and to pass on those costs to their clients. For all those reasons it’s impossible to single out one factor that caused the recent decline.
So, has the price drop over the past four to six weeks been due mainly to a change in asset allocation policies?
That’s one explanation. When interest rates start rising, many people start wondering whether it’s worth carrying on favouring equities while there are bonds with positive returns in investment-grade credit, and even attractive returns in high yield. In the last few weeks many investors have been hesitating on how to divide their portfolios between equities and bonds. This sort of pendulum swing between those two asset classes can at least partly explain the sharp market volatility recently.
“There have been many transfers from investments considered safe towards riskier ones.”
Is this the end of the TINA (‘There is no alternative’) Effect which has been holding up equities in recent years?
I don’t have a definitive view on that. What is clear is that, in addition to the said pendulum swing from equities back to bonds, there have been many transfers from investments considered safe towards riskier ones within asset classes. In bonds, the investment-grade segment has suffered more than high yield; likewise in equities, many higher-quality names have been correcting more than riskier ones. The rise in interest rates reshuffles the cards on several levels.
Excerpt from an interview with Martin Moeller, Co-Head of Swiss & Global Equity at UBP. Full version published on Allnews.
