CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2016, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

A bout of volatility is what the market needed

Home / Press centre / A bout of volatility is what the market needed

Andrew Parry, Head of Equities
01 February 2016
Global EquitiesSourcecapStrategy

With many indices now labelled bear markets after a traumatic start to the year, Andrew Parry, Head of Equities notes it is important to recognise that long-term investment returns are gradually rising, not falling, and that an adjustment was needed, as global quantitative easing had led to elevated valuations in most asset markets.

US rates more influential than China turbulence: Previously, we have said that elevated volatility was the only market prediction that we were certain about. We maintain this view largely because of the “denominator problem”: with official rates hovering near zero and longer term rates suppressed, small changes in interest rate expectations can lead to significant swings in asset prices. It is no surprise, therefore, that the latest bout of volatility can be traced back to the first rise in US rates since June 2006. Indeed, the start of the rout in many asset categories, including commodities, high-yield credit and emerging market currencies, originated when the US Federal Reserve (Fed) ended quantitative easing in October 2014 and the trade-weighted US dollar started to rise. This, more than events in China, is the current source of the turmoil in global markets.

Divergent dangers: While expectations for growth in most major economies have not shifted dramatically over the last year, though the trend in the global GDP growth rate remains relentlessly lower, markets have become subject to changes in sentiment spurred by central bank policy moves. When the Fed reversed monetary policy in December, even by a meagre 25bps, it created a divergence in policy with other major central banks, all of which are either keeping rates low or even inclined to loosen further (see chart below). When rates are so low, such divergences can lead to far more elevated volatility than changes in the underlying economic fundamentals might suggest. The recent announcement by Mark Carney, Governor of the Bank of England, that UK rates are unlikely to rise in 2016, was an indication of the mindset of policy makers. After six years of economic expansion, an inflation-prone economy like the UK was not deemed robust enough to increase rates from 0.5%, reflecting the uncertainty that surrounds markets and economies.

Sovereign bond yields: the US has split from the pack

bondyields

Back to zero: We believe that the tightening cycle in the US will be short, shallow and ultimately reversed and that there is a strong probability of the US having zero or negative policy rates within 18 months. We were going to suggest the purchase of two-year US treasuries, as a yield of 0.83% was a bargain if you accepted our view that the Fed would reverse its tightening cycle in the face of global market turmoil, mounting deflationary pressures and a downturn in the US business cycle. It also provided a low cost put option on the weakness in real asset prices. With the yield now at 0.81% and global markets down by double digits, much of the juice in this trade has been extracted and long-term investors would be best off waiting for a good entry point in risk assets once the inevitable capitulation occurs.

A correct correction: Low interest rates had driven many investors to embrace a level of risk that was well above their natural tolerance as they strived to meet their liabilities in the hope that central banks would provide a “put” through continued monetary easing. The Fed has shaken that conviction and asset prices are adjusting to valuations, which are more appropriate for the level of risk that the uncertain outlook for global GDP would warrant.

The outlier: In these conditions, we still believe that European stocks have three factors going for them: an emerging domestic earnings cycle after years of disappointment, a policy arbitrage that is in their favour and a valuation that is realistic, if not a bargain. With negative official policy rates, a dividend yield on the broad index of about 3.75% on European stocks provides reasonable compensation for uncertain but positive growth. The challenged outlook for global trades means that selectivity is still paramount. We favour quality compounding-growth stocks, which we believe are the best route to navigate through the rocky shoals of strong competition and deteriorating global pricing, backed by selective self-help stories. With the risk of a Brexit very real, the eurozone may well turn out to be a safe haven, especially now its equity market is nearly 25% down from last year’s peak.

Share this post:
Andrew Parry Head of Equities Andrew Parry is Head of Equities and a member of the Hermes Strategy Group. He joined the firm in 2009, initially as Chief Executive and Co-Head of Investment for Hermes Sourcecap, now Hermes European Equities, becoming Head of Equities in 2014. In 2006, Andrew jointly founded Sourcecap with the aim of building a best-in-class investment boutique focused on excellence in European equity management. Prior to this, Andrew established Pembroke Capital Management in 2003 and successfully launched the Magenta Fund, a global equity non-directional fund. Before that, Andrew worked at Northern Trust Global Investments (Europe) Ltd as Chief Investment Officer of International Equities and was responsible for the management of global, international and regional portfolios. He has also held a variety of senior investment roles, including Head of International Equities at Julius Baer Investments, Chief Investment Officer at Lazard Brothers Asset Management, and Head of UK Equities at Baring Asset Management. Andrew holds an MA in Mathematics from the University of St Andrews. Andrew is a member of the Investment Committee of the Trafalgar House Pension Trust and a non-equity director of Aerion Fund Managers. He was formerly an independent investment advisor to the Investment Sub-Committee of the Mineworkers’ Pension Scheme.
Read all articles by Andrew Parry

Press contacts