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Equity market sell-offs are good opportunities to dust off the files on companies that have been on the watch list. It is worthwhile focusing in on quality companies as they are likely to bounce back first. The four companies we have reviewed are SAB Miller, Ryanair, Merlin Entertainments and the roadside assistance company the AA.
Looking at the reasons for the sell-off and these include the slowdown in China, a fall in emerging market currencies and the prospects of a US rate rise. Weakness in energy and metal prices also hit the valuations of the resource sector.
It is also notable that after a long period without the S&P 500 having seen a correction a number of sectors appeared to be somewhat “frothy.” In other words the valuations were high and a number of low quality listings had come to the market.
Going forward and corporate earnings will in part be driven by whether economic growth remains on track or not. The main threat to global growth is the risk of a meaningful slowdown in China and premature tightening of US interest rates.
However, the Western economies look to be firmly back on the growth track, in our view, with unemployment having fallen significantly in the US and the UK. The Eurozone is at a later stage of its recovery but has recently seen unemployment fall.
Accordingly, the current sell-off appears to provide a good opportunity to seek out high quality stocks with attractive long-term prospects. The companies that we had wanted to buy but were perhaps previously put off by the valuations.
