In recent weeks we have had a glimpse of the future, according to Miton UK Multi-Cap Income fund manager Gervais Williams.
Bernanke’s words on 22 May about tapering quantitative easing (QE) have offered market participants real evidence of how the financial world might look beyond QE. Questions over market vulnerability to a bond market sell-off are now discernible.
The conclusions are sobering. When bond yields increase, most assets fall back. Those hoping that bond sellers would drive up equities with their cash proceeds have been disappointed. It did not work out this way.
The rise in bond yields caused commodity prices to fall to new lows. Resource and mining companies, which were already some of the worst performers, fell further.
Mixed performance for income stocks
And many emerging markets, whose economies are more closely linked to the extractive industries, fell faster than most others. Western markets also fell back, maybe because corporate bond issuance ceased and in time much of the funding for equity buybacks was also anticipated to dry up.
What about income stocks? How did they fare? The answer is somewhat mixed. To some degree higher yielding stocks were perhaps a little more vulnerable given their valuations have been pulled up this year. Many of their share prices were often at market highs on 22 May.
Those which have higher levels of debt, such as utility stocks, fell back more than the market. And those with a reliance on market values like fund managers were also relatively weak. However others continued to perform well.
Many insurance stocks outperformed. Beazley hardly moved down, and Royal Sun Alliance seemed to actually move in a better way. Rising bond markets have undermined insurance rates for years, so many UK income funds have held up relatively well.
However, perhaps the most interesting move was amongst smaller companies, particularly micro-cap stocks. Although the sector has performed very strongly over the last 18 months, the FTSE Small Cap and FTSE Fledgling indexes barely fell at all.
Since nearly all institutional investors are underweight these sectors, it seems there are very few active sellers. And given income stocks tend to run at lower beta levels, the multi-cap income strategy has proved to be unusually resilient in the period.
Gervais Williams is manager of the Miton UK Multi-Cap Income fund
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