As investors navigate the uncertainty in the markets, they would be wise to consider earnings growth, dividends and active management, according to Quilter Investors.
While the current market cycle is bullish, following the success of the global vaccine rollout, there are also concerns around inflation and the impact it could have on asset prices.
Paul Craig, portfolio manager at Quilter Investors, says: “The current market cycle is bullish just now, but also on somewhat of a knife-edge. The hard data and economic surveys are all trending in the right direction, and any concerns around economic growth stalling are easing. As such, we are in somewhat of an economic sweet spot right now, and there are opportunities for investors to get good quality assets at attractive prices right now.
“And it is this overriding quality that should be focused on. Given markets have come a long way in a short period of time, it ultimately won’t take a lot to knock them off their current valuations. Variants, levels of immunity and central bank tapering all remain on the table. The worry is many are chasing after the returns, instead of considering those businesses that have strong potential in a recovery, as well as quality characteristics should things turn sour once again.”
According to Craig, businesses with strong but consistent earnings growth will be the ones to thrive in different market environments. Many companies are revising earnings upwards and many will have opportunities ahead of them as the economy reopens and pent up savings are spent.
Dividends will also be an important factor to consider, with companies across the globe starting to reinstate their dividend, often at more sustainable payouts. With dividends coming under scrutiny, those that are able to pay out should be seen as a sign of a strong balance sheet and prospects. This is particularly the case for the UK and Europe where banks have resumed their dividend payments and will likely benefit from a rise in interest rates in the near future.
Lastly, Craig believes active management thrives in this kind of market.
He explains: “It is vital to make sure you know what you are owning and not be overexposed to risks in the market. Passive funds will continue to be dominated by the big tech companies, yet it is likely these that could fall the hardest in any market correction. Instead active managers who are identifying the opportunities at attractive values, almost regardless of style, should do well in this environment.”