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Our Investment Approach
There are three key inputs to our investment process – macroeconomic analysis, fundamental analysis and technical analysis.
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The macro-economic assessment takes account of the level of global and regional economic activity and our view on the level and direction of interest rate and currency movements. The aim of this analysis is to assess the relative attractiveness of equity, bond and cash investment and the potential impact on each region, sector and specific stocks.
Our fundamental analysis is designed to assess the valuation of equities relative to other asset classes and historic normal levels. We compare the real equity yield (based on consensus return on capital forecasts as opposed to reported or forecast earnings) with the yield available from inflation protected bonds. This gives us a view on the real excess return available from equities. |
The long-term average equity risk premium is around 2.5%. Therefore, if the real excess return available is significantly above this level, it will suggest a strong positive view on equities and if it is significantly below this level, it will suggest a more cautious or defensive position.We also examine the return on capital at sector and stock level with a view to overweighting opportunities where we believe there is real value and avoiding investments that are overvalued. While we believe that over the long-term equity movements are driven by valuation, over short-term periods, investor sentiment can be a much more powerful force. We find that technical analysis is veryeffective in helping us to gauge investor sentiment.
Our technical analysis examines long and short term equity market price movements with a view to identifying trends and inflection points. We also look at volatility levels and investor confidence indicators. The ideas and themes resulting from this analysis will be reflected in our portfolios.
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Merrion Capital Investment Managers Limited (trading as Merrion Investment Managers) is regulated by the Central Bank of Ireland | |