We have mentioned previously on this blog, that the UK stock market has been difficult to beat over the last five years, as a result of extraordinary monetary policy. QE was designed to lift asset prices and it has done so indiscriminately. The rising tide of QE has lifted all ships. The chart below is a good demonstration of this effect, illustrating that global stock correlations have been at elevated levels since the onset of the financial crisis in 2008.
The chart essentially shows the extent to which global stocks move in tandem. A reading of 0% would indicate that there was no correlation between the movements of individual stocks, whereas a reading of 100% would suggest perfect correlation between stocks – all shares moving in the same direction, all the time.
The average since 1990 is about 12%, suggesting that there is a low but positive correlation between the performance of individual stocks globally. This is intuitive – all companies operate in the global economy and the fortunes of the global economy therefore should explain part of the performance of all shares. But the more dominant influences of performance should be the individual characteristics of specific stocks and the operational performance that companies deliver – in other words, fundamentals matter.
At least, they matter most of the time. The chart above suggests they have mattered much less over the last five years than is usually the case – global stock correlations have been significantly higher than usual, particularly between 2009 and 2012.
In recent months, however, global stock correlations have been falling again and have moved back below average. We welcome this trend and take it as a sign that we are moving back into an investment environment in which successful active stock selection is more appropriately rewarded.
We believe there is a long term opportunity for active stock pickers to benefit as fundamentals reassert themselves as the primary influence of long term share price movements.