With the 5th anniversary of the US emerging from recession upon us, BlackRock’s Andrew Wheatley-Hubbard, co-manager of the BlackRock Global Income fund, discusses the impact that the prospect of global rising rates has had on Global Equity markets and income investing:
“The prospect of rate hikes has created fear for the future returns to dividend-paying stocks, but identifying the type of “income stocks” is vital. Some dividend stocks, paying high yields but offering no growth, are “bond proxies” and as such their value will fall as rates rise, similar to bond markets.
For example, considering the period April to September 2013 when rates were rising, we saw the utility sector and REITs fall in absolute terms. However for stocks with quality fundamentals that combine attractive yield with sustainable growth, the negative impact of rising rates will have much less of an effect.
If rates are rising because growth prospects are improving, these companies will capture the growth; if there are fears of inflation, they can capture that in pricing.
“Our fund does not invest in stocks based purely on yield, and has no exposure to utilities or REITs. We identify quality characteristics in stocks, seeking out those companies with operational strength, financial resilience and a policy of returning cash to shareholders.
“As we approach the end of 2014 the rising rates feared are yet to materialise. Notwithstanding this, questions remain regarding the strength of the US economy, as the Fed revises down its GDP forecast yet again and mixed economic data is reported.
“Sentiment and expectations for GDP growth in the US, and elsewhere, have been much more volatile and optimistic than the steady, slow growth actually delivered. The volatility seen in the market earlier this quarter reminds us how nervous investors are about the strength of growth in the US.
“Quality businesses with strong pricing power and the ability to grow and expand their footprint present investment opportunities. These businesses have proven themselves capable of delivering sustainable growth despite a weak economic backdrop, and are found across the equity market. For example:
- McDonald’s, has a dividend yield over 3% which it has historically grown at over 10% per annum. The ‘Golden Arches’ is one of the most recognized corporate symbols globally. This global brand visibility brings geographical diversity to the company’s revenues, and combined with sustainable growth prospects make this the type of quality compounder we like to own
- Microsoft, the Global technology company, has a strong history of cash generation with only 10% required for Capex and 40% paid out in dividends. We see Microsoft as an enduring franchise, synonymous with PC’s for many-years, the Windows operating system is ingrained in many businesses across the globe.
“Historic analysis shows that moderate rate rises are good for broad equity valuations, and so we do not need to fear this. The different pace and timing of policy from the Fed and the ECB naturally opens opportunities in the global equity markets.”