Invesco’s Walker: How to find attractive equities as bond yields rise


While rising bond yields have shaken stockmarkets in the short term, Invesco Perpetual’s Martin Walker argues that equities remain the best way to capitalise on better global growth.

Bond yields have advanced in recent weeks as investors watch the strengthening US economy and speculation that the Federal Reserve will soon slow the pace of its quantitative easing programme. Equity valuations have come under pressure in light of the resultant increase in the risk free rate of return in bonds.

Walker, manager of the £1bn Invesco Perpetual UK Growth fund, says: “It is worth remembering that economic growth is one of the drivers of equity performance, which is not the case for bonds. Economic growth underpins growth in company earnings and hence the improving economic outlook should prove positive for equity markets over the medium and longer term.

“It is also worth noting that the end game of quantitative easing is not deflation but inflation – and that equities, with share prices driven by nominal earnings growth, are a much better bet than bonds in an inflationary environment.”

The manager adds that equity portfolios need to have exposure to growth to perform in a world of rising bond yields. He also concedes that UK starting valuations are “no longer as compellingly good value”, but notes that company earnings growth and investment of retained earnings are attractive in the country’s improving macroeconomic environment.

Walker highlights a number of holdings that he believes display these necessary characteristics, including creative and marketing services group WPP – which should benefit from improving global growth. Meanwhile, insurer Resolution is well placed for the rise of defined contribution pensions, while tile specialist Topps Tiles would benefit from an up-tick in the housing market.

Invesco Perpetual UK Growth’s cumulative performance to 29 August 2013

Invesco Perpetual UK Growth 2.87% 13.55% 35.79% 71.81% 63.86%
0.83% 7.34% 23.73% 46.65% 45.82%
2.03% 5.78% 9.75% 17.16% 12.37%
  52 / 283 18 / 280 28 / 280 20 / 266 47 / 246
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Source: FE Analytics