Markets ended the second quarter of 2015 on somewhat of a sour note as concerns over the European leadership’s inability to strike a constructive deal with Greece weighed heavily on risk assets during the last few days of June. Meanwhile, rising longer term interest rates in the second quarter crimped the performance of most fixed-income securities. The relentless banter of the news media about various geopolitical woes has been louder than ever; and yet the economic progress of most developed countries continues to improve.

Over the first half of 2015 the global economic recovery stayed on relatively firm footing although the advancement of individual countries and industry sectors remains uneven — a pattern we have seen since the end of the Great Recession in 2009. On a regional basis, the US picked up steam in the second quarter while Europe and Japan continued to stabilise.

Even in the face of renewed geopolitical concerns, economists are projecting world output to advance at about a 3.5 per cent growth rate in 2015, roughly equal to last year’s growth. In a recent publication, the International Monetary Fund (IMF) declared that relative to last year, the outlook for advanced economies is improving, but growth in developing economies is expect to be lower due to diminished prospects for some of the larger emerging markets including China and the oil exporting nations.

Beginning in mid-June, a sharp downward spike in Asian stock markets, led by plunging local share prices in China pressured global equities markets in the start of the third quarter and created some fundamental concerns about the region. On the other hand, the local Chinese ‘A-share’ market had already more than doubled in value since last year and therefore that market was probably due for a correction.

In North America, the US economy has been playing catch-up from a soft first quarter, when poor weather, a stronger dollar and the port strike crimped first quarter growth but those events now appear largely transitory. America is already seeing better trends in housing as weather thawed and mortgage rates remain low. Gains in homebuilding, new home sales, and pending home sales have been strengthening with contracts up to their highest level since 2006. Also, manufacturing is picking up, the trade gap is narrowing again and car sales continue to advance strongly.

Over in Europe, economic activity improved throughout the first half of this year and forward progress has been steady despite concerns about Greece. The Greek drama became even more heated late in the second quarter when German leader Angela Merkel signalled that euro policymakers had reached the limits of their ability to safeguard Greece, offering the government no further concessions to step back from the brink. Greek Prime Minister Alexis Tsipras then called a national referendum to determine the country’s popular opinion on the matter, but citizens ultimately voted against austerity. This defiance sent Euro leaders back to the drawing board after Greece missed a €1.7 billion interest repayment to the IMF. A new deal is again in the works as of this writing, but surely we have not heard the end of the story.

After hitting many important new high levels across the major world equity markets, it was a bit disheartening to see stocks surrender a good part of their year-to-date gains during the last few trading days of June. On June 29, global bourses suffered their worst one-day loss so far this year in reaction to the Greek impasse. For the first half of 2015, the S&P 500 officially gained just 0.20 per cent but with a lot of volatility in between.

While stock valuations may be considered somewhat high by historical standards, the sideways trading of the markets in recent months has allowed earnings to catch up with stock prices making them better values. Meanwhile, alternatives to equities (ie bonds) are not particularly enticing, allowing some room for comfort. Low interest rates, low inflation and accommodative central bank policies have historically been a supportive environment for equity markets.

While many widely touted growth stocks are trading at nosebleed levels, most high dividend-paying stocks have dramatically underperformed the broader market. In a recent research note, Bespoke Investment Group divided the S&P 500 into ten groups of 50 companies, ranging from the highest dividend-yielding stocks to the lowest. The 50 top-yielding stocks in the index were down 6.8 per cent for the second quarter, while the next 50 fell 5.2 per cent. Both groups significantly trailed the 0.23 per cent drop for the index. On the other hand, companies with low or no dividends posted outsize gains. The bottom 50 companies by yield, all of which pay no dividends, were up 6.4 per cent for the June quarter, while the next 50 lowest-yielding stocks were up 4 per cent.

Indeed, markets are experiencing somewhat of a rerun of the 2013 ‘taper tantrum’, when panicked investors dumped bonds and interest rate sensitive stocks at fire sale prices on fears of a huge increase in interest rates which never materialised. Looking back, that was a great time pick up high dividend-paying stocks on the cheap. That script seems likely to play out again.

Another area poised to perform well is the healthcare sector which continues to benefit from the steady ageing of the world population, record FDA drug approvals, a massive health insurance push from America’s Affordable Care Act and a wave of merger and acquisition activity in the industry.

Fixed-income markets have lately been quite volatile but we also see opportunity in select areas of this asset class. In this environment we continue to prefer preferreds. Specifically, several individual preferred stock issues offering yields hovering around the six per cent level look attractive.

Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.