Inflationary fears form the backdrop to good indicators for several markets and sectors, but there are robust defensive moves investors can be taking to mitigate the risks.
Investors need to monitor a range of variables as the coronavirus outbreak continues. Here, wealth management experts from our panel explain key risks – and opportunities – to watch out for over the coming month.
Asia ex-Japan is pegged as a strong bet for those with the stomach for volatility
Equities investors are urged to focus on corporate earnings going forward
The merits of gold are weighed up as extraordinary times continue globally
Experts paint a picture of low inflation and interest rates for some time to come
Investors are urged to look through the sustainability lens across their portfolio
The start of the year has been eventful so far, with the formalisation of Brexit seeming almost insignificant in the shadow of a mysterious virus outbreak in Wuhan, which has now gripped the world’s concern.
Asian markets have bled significantly since early January, pushing price-to-book valuations below their historical average of 1.6x. We expect that share prices will likely stay under pressure in the near term, as we expect consensus earnings estimates to be shaved down by 2–3 percentage points for the full year, following the coronavirus outbreak.
However, once the virus is contained and conditions start improving, it is likely that analysts will revise their estimates upwards, which should partly offset the recent downgrades.
Which stocks will stand up well and which will suffer? We expect that more robust equities such as in the telecoms, consumer staples and utility sectors, to be resilient.
Which stocks will stand up well and which will suffer? We expect that more robust equities such as in the telecoms, consumer staples and utility sectors, to be resilient
On the other hand, with travellers wary of the virus, air travel, hotel and tourism spending will likely take a beating. This will also be reflected in the earnings of tech companies facilitating bookings and, importantly, cancellations. Nonetheless, with organised response and treatment requiring time, we expect to see recovery of these market segments in the second half of 2020.
In the 2003 SARS outbreak, Asian equities declined 12% between January and April, though in that case geopolitical tensions had already depressed sentiment and amplified the damage to equities. This time around, we should see a much smaller 2-3 percentage point cut to Asia, excluding Japan (AxJ), and overall earnings for the region should be just 1 percentage point lower.
With Asia ex-Japan valuations below their historical average and given our expectation that the overall earnings impact will be limited, we remain positive on these equities. The region now trades at a significant ~35% discount to global markets, well below the historical average of 23%. But as the situation is fluid, we expect markets to remain volatile over the next few weeks. Heightened near-term volatility provides opportunities through structured strategies, in our view.
Economist at UBS Global Wealth Management
30 odd years in the markets has hardened the senses and taught me the value of staying calm when risk picks up. After a bumper year in 2019, markets have come under early pressure this year with panic and stress shaking markets following the outbreak and spread of the tragic coronavirus. Markets, in their usual fashion, ebb and flow between the impact being a non-issue to it being the harbinger to a global recession. Our view is that it is too early to make such a bold call and that now is a time for not panicking into taking potentially bad decisions at the wrong time.
The market sell-off has been fairly severe, with markets falling 5% from their highs on the 20th January. The coronavirus has been widely cited as the cause of the sell-off, but markets were already close to over-bought levels and susceptible to a sell-off on bad news. 2019 was a bumper year, which saw stock markets rise some 20%, with much of that price rise coming in the last quarter of the year. By the end of the year, we’d seen big price rises in stocks with very little in the way of earnings’ growth to justify the valuations. In fact, in core markets like the US, valuation metrics such as forward price-to-earnings at 18.6 times were the highest that we’d seen since 2002. Being priced to perfection made share markets very vulnerable to a correction.
In core markets like the US, valuation metrics such as forward price-to-earnings at 18.6 times were the highest that we’d seen since 2002. Being priced to perfection made share markets very vulnerable to a correction.
Waiting for further information on the effects is imperative to establishing clarity on the macro-outlook, which in turn gets us back to focusing on wanting to see evidence of improving corporate earnings: something we’ll get a marker on over the month or so. Staying calm seems the prudent approach for the moment with stock markets.
Head of Investment Strategy at Punter Southall Wealth
Today’s globally connected economy makes it vital to understand the investment landscape on a global view, across asset classes. This is a weighty task for any individual (which is why wealth managers have whole investment research teams), but particularly so for someone trying to manage a portfolio in their spare hours. Times like these really highlight the value of having a professional monitoring a volatile situation on your behalf. See which wealth managers could take the strain for you, free, via our 3-minute search.
Gold had quite the run in 2019, gaining more than 19%. Of course, the commodity vastly underperformed the S&P 500, but then again what didn’t in the year that Trump made America great again (as far as the stock market is concerned)? So, is it time to pile in now and are the markets poised for more gains?
Without the aid of a crystal ball, there is certainly a lot to like about this precious metal. Interest rates are low, so the cost of holding gold has decreased on a relative basis. Gold pays no dividends, costs money to store (which is implied in the price), but with government bonds also paying next to nothing, all that makes less of a difference.
Gold pays no dividends, costs money to store (which is implied in the price), but with government bonds also paying next to nothing, all that makes less of a difference
As a hedge against inflation or the geo-political situation going pear-shaped and the markets selling off, it is also a great investment. What is interesting though is that Gold has gone up as much as it has, whilst we’ve seen the stock market setting record highs, and there are scant signs of inflation. So, one of the current prices of either gold, the S&P or US Treasuries must be wrong. That is because they have all gone up and they shouldn’t have by definition – why else would we seek to diversify our investments if all our holdings go up and down together?
Clearly, these are not normal times, when things are not behaving as they should. So as regards to investing in gold, the question we may need to be asking ourselves is not should we buy, but rather how much?
Chief Investment Officer at Blu Family Office
In 1999 there were just 248m Internet users, or just 0.4% of the world population. By 2018 this had risen to 4.5bn, or 58% of the world population.
In 1999, the internet was only available in the home or office. Today it is accessible on mobile devices almost anywhere in the world.
This has radically changed the way we live and do business. We are able to compare prices online and access manufacturers directly to buy items from anywhere in the world whilst on the move. Technology has enabled the globalisation of trade by keeping inflation, and by implication interest rates, low for a sustained period of time. Automation of production and ageing populations have also contributed to keeping prices under control. Central banks with 2% inflation targets seem to be pushing on a piece of string, with low interest rates and quantitative easing failing to get inflation above target.
Central banks with 2% inflation targets seem to be pushing on a piece of string, with low interest rates and quantitative easing failing to get inflation above target
Low interest rates have in turn supported bond and equity markets with dividend and earnings yields exceeding bond yields in many developed markets. So, what can go wrong?
Trump’s trade tariffs are a move to reverse some of the globalisation but if this leads to inflation, they will be unpopular. Therefore, deals are likely to continue to be done as we have seen with China. There are likely to be more questions about the environmental impact of shipping goods around the world but without coordinated government actions it is unlikely that the general populous will want to pay higher prices.
We therefore believe that we are likely to see inflation and interest rates remain low for a prolonged period of time which will be broadly supportive of financial assets. The inflation conundrum, in our view, is here to stay.
Chief Investment Officer at LGT Vestra
Sustainable investing is a hot topic at the moment. Public awareness of issues like climate change and plastic pollution has risen quickly up the agenda, with the environment the fourth most important issue in last UK election, in joint place with the economy.
As public awareness about environmental issues grows, people’s attitudes and behaviour are changing at a rapid pace. The rewards for businesses and investors who exploit this trend are immense. A good example of this is the US-listed company Aptiv, which provides exposure to mega trends in the auto sector, like technologies and products around autonomous vehicles and increasing requirements for cars to be safer, greener and better connected.
Companies that can satisfy consumer demands – such as safer and low carbon transport – may be able to grow their sales faster than the competition and could represent better investments
But why does this matter to investors? To begin with, it illustrates the influence of consumer behaviour and regulation. The UK launched the Road to Zero Strategy in 2018, setting an ambition for at least 50% of new car sales to be ultra-low emission by 2030. As the electrification of the car is progressing faster than many anticipated, consumers are demanding safer vehicles underpinned by active safety, such as systems that help to avoid accidents by reacting before the collision.
Companies that can satisfy consumer demands – such as safer and low carbon transport – may be able to grow their sales faster than the competition and could represent better investments. We see this trend across lots of industries, whether it’s renewable energy providers tapping into the shift to a low carbon economy, or water engineering businesses like Xylem providing sanitation and water reuse.
Of course, companies will not always benefit from changing consumer behaviour. Sometimes they will simply have to accept more rigorous standards. We recently asked Kadence, a research agency, to talk to people about sustainability when they were shopping. While 84% of people claimed sustainability was important to them, Kadence found consumers were actually looking for their favourite brands to become more sustainable and take into consideration the environmental impact of their products. As consumer interest in sustainability grows, companies – and their investors – will need to think how it affects their businesses, whether positively or negatively.
Fund Manager of the Quilter Cheviot Climate Assets Fund
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.