Investment Bulletin:
February 2018

This month:

Market sell-off shocks investors out of complacency

  Markets adjust to the shifting stance of central banks.

  Opinion divides over the fate of fixed income.

  Bond market sell-off nonetheless seen as fairly orderly.

  Weaknesses in portfolios become exposed.

Featuring this month’s experts:

Earlier in the month, unexpectedly strong US wage growth figures pushed US rates higher, setting off the largest two-day equity selloff since the “flash crash” of August 2015.

Here, leading wealth managers from our panel give their assessment of the market blow-up and explain the key risks – and opportunities – investors should be thinking about.

Stuck between a rock and a hard place?

Insights from:

Expert Investment Views, Extreme currency volatility, monthly investment tips, Portfolio

Tom Becket, Chief Investment Officer at Psigma Investment Management, says:

Predictions over the end of the bond bull market have ruined many a career already, so any pontification has to be read with a major dollop of scepticism.

However, my views are that the cyclical lows in bond yields (and high in government bond prices) were achieved in the summer of 2016, as investors freaked out over Brexit and global deflation.

Now the talk is all of synchronised global growth and reflation, an argument I have no major short-term argument with, which should lead to further upwards pressure being exerted upon government bond yields.

Longer term I am caught between the rock of expecting disastrous demographic and debt trends in the developed world leading to lower bond yields than we saw in the summer of 2016; and the hard place of recognising that developed world governments are basically broke and have no ability to pay back the debts they have accumulated, which should lead to higher yields.

We like certain emerging market bonds, which are benefitting from high levels of risk appetite, and financials bonds, which are enjoying the improving economic environment and should be helped by rising interest rates boosting banks’ profitability.

Our current position is very corporate credit specific, extremely selective and we particularly favour shorter-duration bonds, where we have higher predictability of getting our money back and less sensitivity to rising interest rates.

In particular, we like certain emerging market bonds, which are benefitting from high levels of risk appetite, and financials bonds, which are enjoying the improving economic environment and should be helped by rising interest rates boosting banks’ profitability. However, my key advice would be ‘keep an open mind’ and be prepared to change tack quickly as the ongoing environment dictates – not least as there will be times when both my ‘rock’ and ‘hard place’ scenarios look possible.

Thomas Becket - Psigma Investment Management

Tom Becket

Chief Investment Officer at Psigma Investment Management

Shifting sands

Insights from:

Seven Investment Management

Alex Scott, Chief Strategist at Seven Investment Management (7IM), says:

We suspected that a rise in market volatility was likely in 2018 – but of course, no-one knew how or when it would play out. That risk seemed very far from investors’ collective consciousness as global stockmarkets roared higher through January in one of the best starts to the year seen in the last three decades – not since 1994 has the MSCI World enjoyed a stronger return for the first month of the year. We found ourselves reappraising (and, luckily, revalidating) our own somewhat cautious investment stance in the face of such strong market momentum.

Perspective is required. The market volatility of the last few days, triggered initially by stronger than expected wage inflation data in the US unsettling bond markets, is a stark and sudden shift from the dead calm of the last 12 months or so. The one-day moves in stockmarkets were quite large (the US saw the biggest one-day move since 2011), but market behaviour so far has remained quite orderly. Volatility measures have risen, but so far there has been little sign of sustained panic or disruptive effects in other assets, such as high-yield bonds or commodities.

Volatility measures have risen, but so far there has been little sign of sustained panic or disruptive effects in other assets, such as high-yield bonds or commodities.

There may be more volatility to come before the market stabilises, but it seems likely to us that this episode is a correction of high valuations and a sign of markets adjusting to the shifting stance of central banks, rather than the first act of a recession and a deep bear market.

Expert Investment Views, Extreme currency volatility, monthly investment tips, Portfolio

Alex Scott

Chief Strategist at Seven Investment Management (7IM)

The markets are selling off – what to do now?

Insights from:

Investment Tips, Investment

Christian Armbruester, Chief Executive of Blu Family Office, says:

As we enter February, everything is down – the stock markets, the bond markets and even the commodity markets.  Losses are high and seemingly accelerating.  Is this a time to reduce risk and sell out of our investments?  There is no way of knowing and hence an impossible decision to make.  Which means you should also never have to make it.  If you are panicking because you have unexpectedly large losses, then clearly you had to too much risk on to begin with.

That’s the thing about market sell-offs. They not only expose weak points in a portfolio, but they also make the one taking the risk face up to the realities of their decision-making.  No one likes losses; no one wants to take the responsibilities associated with having to explain them.  Why didn’t we see the warning signs; why did volatility all of a sudden come back after eight years of being dormant for so long?

If you are panicking because you have unexpectedly large losses, then clearly you had to too much risk on to begin with.

It’s a cleansing thing, to take losses. Look for it in your investment managers you entrust to execute your chosen strategy. The numbers don’t lie and if someone promised you better risk-adjusted returns or protection to the downside, that had better come through in positive and not negative numbers.  Sell-offs are a great time to understand the risks you are truly exposed to and clarify your emotional attitude towards them.  They are also a welcome gift and you can maybe even pick up a few things that have become cheap.

Blu Family Office - Christian Armbruester

Christian Armbruester

Chief Executive of Blu Family Office

How is your (Risk) appetite?

Insights from:

Economy, Expert Opinion, Markets, monthly investment tips, Portfolio

Colin MacKenzie, Director, Investment Management, at Arbuthnot Latham & Co., Limited, says:

For some time now, an appetite for risk has paid off as equity and bond market investors have benefitted from rising asset prices, supported by a plentiful supply of cheap money, low inflation and stable economic growth.

Last month’s comment on the importance of monitoring inflationary pressures has proved prescient.  In early February, a report that annualised hourly earnings and the number of jobs added to the US economy were much larger than forecast, was interpreted as a potentially inflationary development, prompting many investors to hastily re-assess their inflation, interest rates and asset markets forecasts.

Bond yields had already increased somewhat from their recent lows, but recent developments have led to a spike in bond yields to what many observers believe is a critical level, raising fears that interest rates may rise faster and further in order to control inflation.

Being short volatility was one of the most successful trades in 2017. The attraction of such a strategy for some investors can be attributed to extreme bond valuations and the need for income. This environment also bred new strategies that allowed for higher leverage and equity exposure. A sharp adjustment has therefore caused a lot of forced selling for those exposed to such positions with many impacted by liquidity calls.

Early indications are the severity of the recent market sell-off was technically led and not caused by traditional ‘long-only’ investors rushing for the exit. Whilst the market may take a while to recover its composure, investors with sufficient appetite for risk should be rewarded as we still believe the global economic background to be supportive of positive equity returns.

Caspar Rock, Cazenove Capital

Caspar Rock

Director, Investment Management, at Arbuthnot Latham & Co., Limited

Equity investors should keep their cool

Insights from:

China, Currency, FED, Interest Rates, Value Investing

Chris Beckett, Head of Equity Research at Quilter Cheviot Investment Management, says:

The current bull market, as defined by a continued rise without a 20% pull back, is heading towards its ninth year. However, after a very strong start to the year, volatility has returned to equity markets with a vengeance. The immediate trigger was a better-than-expected employment report in the US on Friday 2 February, particularly the pickup in wage growth, that raised expectations for the pace of interest rate rises and treasury yields.

Whilst the sell-off in bond markets has been quite orderly, movers in equity markets have been anything but. Yes, higher bond yields reduce the attractiveness of equity investments, but it is also important to remember that current market moves have been caused by good economic news, not bad. The fall was mainly a valuation correction that is a buying opportunity for investors prepared to take a slightly longer-term view. We are advising investors to keep their cool, focusing on advantaged companies trading on sensible valuations.

We expect equities to continue on their current upward trend in 2018, supported by the relative valuation argument.

We believe that the outlook for 2018 is positive. Fundamentals for equity markets remain strong, the global economy is growing and corporate profits are rising. Unemployment is falling, stock valuations of 15x earnings look reasonable, earnings growth has rebounded and investing in equities continues to be very profitable. We expect equities to continue on their current upward trend in 2018, supported by the relative valuation argument.

Investment Tips, Investment

Chris Beckett

Head of Equity Research at Quilter Cheviot Investment Management

Equity valuations moving towards reasonable

Insights from:

Cazenove Capital

Caspar Rock, Chief Investment Officer at Cazenove Capital says:

The current bull market, as defined by a continued rise without a 20% pull back, is heading towards its ninth year. However, after a very strong start to the year, volatility has returned to equity markets with a vengeance. The immediate trigger was a better-than-expected employment report in the US on Friday 2 February, particularly the pickup in wage growth, that raised expectations for the pace of interest rate rises and treasury yields.

Whilst the sell-off in bond markets has been quite orderly, movers in equity markets have been anything but. Yes, higher bond yields reduce the attractiveness of equity investments, but it is also important to remember that current market moves have been caused by good economic news, not bad. The fall was mainly a valuation correction that is a buying opportunity for investors prepared to take a slightly longer-term view. We are advising investors to keep their cool, focusing on advantaged companies trading on sensible valuations.

Following the falls in global equity markets, valuations have moved towards a more reasonable level.

Following the falls in global equity markets, valuations have moved towards a more reasonable level. In light of this weakness, we have been adding a little weighting to our positions very selectively, and specifically to Japanese equities to bring our weightings to where they were prior to the fall in markets on 6 February 2018.

Caspar Rock, Cazenove Capital

Caspar Rock

Chief Investment Officer at Cazenove Capital

Important information

The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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