Why large-cap multinationals offer protection from growing volatility

Among an array of macro uncertainties, such as trade wars, protectionism, Brexit and political uncertainty, one of the principal reasons for spikes in equity market volatility this year has been liquidity. Central banks have provided unprecedented levels of liquidity to the market since the Global Financial Crisis, which has created significant distortions in valuations.

Ten years on, as central banks move to tighten monetary policy, the process of liquidity withdrawal and interest rate ‘normalisation' is reigniting equity market volatility. This situation has been exacerbated by international investors' underweight position in UK equities leading to a lack of supporting inflows, and a ‘negative momentum' effect from the rise of passive and quant-based investing. What we have learnt about liquidity over the past decade Equity valuations are determined in part by future growth rates, but also by the rate at which that future growth is ‘discounted' back...