Dublin - Amid a volatile second half of 2020, we see opportunities in global small caps.
As we look into the second half of 2020, we believe the outlook for global small cap equities is still positive. Nevertheless, we're conscious of the fact that they have rallied about 45% since the lows of March 2020. The direction of travel from here has got to depend on the direction of travel with the coronavirus pandemic, or any medical breakthrough in relation to that. And indeed it's the success, or otherwise, of monetary and fiscal policy responses around the world.
One thing for sure, volatility is probably going to remain elevated for a number of months to come. But within that, we see opportunity. Two areas of opportunity we find, one is valuation. We feel the market is ignoring valuation to a large degree and over time, valuation needs to be justified by economic returns. We feel lower quality companies as measured by return on equity, return on invested capital have rallied too far, quite frankly, in recent months. And those higher quality companies, which tend to return better for investors over time, have lagged behind. We think that's an opportunity.
We also think the changing behavior of investors and how they spend... or not investors, we think the changing behavior of consumers and how they spend their discretionary dollars is changing as they avoid air travel, they avoid concerts and also revert to spending more on e-commerce, on staycations and on home improvements, etc. So the changing behavior of consumers is an important opportunity as well.
There remain risks, many risks in the world today, and we need to be conscious of the fact that in the second half of the year, a number of these fiscal stimulus measures will start rolling off, and we need to be conscious that consumers may feel the pain of that. Nevertheless, we also, on the positive side, could see success as we transition to more stable economic growth. It's simply a risk we need to be conscious of.
In essence, we're still in the state of alert. Volatility will remain high. The range of outcomes for equity markets is wide. We continue to do what we do throughout the economic cycle: focusing on companies which are in control of their own destiny as much as possible. We do not point our portfolios in the direction of one particular market direction or other. We focus on high quality companies with structural growth tailwinds and characteristics consistent with our investment philosophy, which is quality, valuation and time, QVT.