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.
Although the ramifications of the pandemic remain uncertain, investment experts see plenty of opportunities to buy undervalued assets presently. European equities are one stand-out, but certain corporate and government bonds are also looking attractive, the experts argue.
The case is made for equity markets continuing to rise
European equities are lauded as comparatively cheap
Opportunities across a range of asset classes are highlighted
Investors urged to fix their eyes on the long term to ride out volatility
The recent rally in equities may not be as strange as it seems. Much has been made of the disconnect between the recent stock market rally versus the ongoing economic turmoil, courtesy of the Coronavirus. Far be it for us to take a view on where equities go next, but given all the negative sentiment, it might be worthwhile to also consider why the markets could go up further.
For one, equities are forward looking and what happened in the past is of no concern when assessing the fair value of the markets. Yes, the pandemic is far from over, but it will end. Asia and parts of Europe are already showing clear signs of a recovery. What about all the damage though – the bankruptcies and huge numbers of unemployed? There is a price to pay clearly, but governments and central banks have pretty much underwritten the whole carnage, just as they did in 2009. And lest we forget, markets rallied 400% from the lows up to March of this year.
The world could come together with a renewed spirit of cooperation as we focus on saving the planet and develop new and better ways of doing things
Higher taxes, slower growth, or further economic fall-out? Sure, could happen, but then again, we could also be on the cusp of a new technology age. Maybe we all become super-productive beings whilst working from home, drawing energy and strength from spending more time with our families. We could also see the end of populism, as people tire of the ineptness of governments who only ever blame others, whilst offering no solutions to the current crisis. The world could come together with a renewed spirit of cooperation as we focus on saving the planet and develop new and better ways of doing things.
Everything is possible in the future, and it makes you wonder why we would ever consider selling even one share, in view of the infinite possibilities?
Chief Investment Officer at Blu Family Office
Following the 2011 sovereign debt crisis and Brexit in 2016, European equities fell out of favour. They lagged the rest of the world in the last economic cycle, returning 10.6% annualised in sterling compared to 16% for the world index. Investors were desperate to avoid the perceived political risk of the EU. But now, we think they might finally be emerging from lockdown. Why is that?
European equities are cheap in comparison to other markets. Europe has great companies, but asset allocators aren’t keen. If you analyse US, UK and European stocks following those two periods of underperformance, the discount suffered by European shares widened and didn’t narrow back. So, there could now be a “return to normal” valuation – provided regional politics don’t get in the way.
But there is the feeling that political risk in Europe might be subsiding. There has always been a cultural push and pull between North and South, with Northerners being far more debt averse than Southern counterparts. And EU solidarity took a beating during COVID-19 – Italy felt let down by the block. But recent headlines have been more constructive, with Macron and Merkel working together on a plan to issue joint bonds to help countries that suffered most in the pandemic.
If you analyse US, UK and European stocks following those two periods of underperformance, the discount suffered by European shares widened and didn’t narrow back. So, there could now be a “return to normal” valuation – provided regional politics don’t get in the way
There is also a difference in that European stocks tend to be cyclical; industrial exporters and capital goods manufacturers that follow the vagaries of the market and are highly volatile. But the post lockdown recovery looks quite strong and Europe could be front and centre of a cyclical recovery, meaning European equities could receive a boost.
So we are putting our reservations behind us, as we think Europe may finally offer a glimmer of hope. And at the moment, we are more positive about European equities than we have been for a long time.
Chief Investment Strategist at Smith & Williamson Investment Management
There certainly do seem to be lots of opportunities to invest in undervalued assets at present, but deploying your wealth wisely has to be the name of the game, rather than indiscriminate buying. Before making any significant changes, why not speak free of charge to an expert investment manager to check your strategy?
It would be easy for all of us to retreat into the bunker at the end of a truly “unprecedented” period for the world, the global economy and financial markets.
While our allocations to equities have been reduced and we are storing up higher levels of cash within our portfolios than normal, this should not be viewed as a negative long-term view on the potential to achieve our clients’ long-term investment aims. Indeed, we continue to be very positive about the prospects of many geographic regions and equity sectors. While certain indices are very expensive, not least the behemoth US equity market, others are cheap by comparison to history, and we remain optimistic about the potential for returns from Asia, Japan and the UK.
To try and help us put together the pieces of a particularly testing global economic, political and market jigsaw, we gathered together 16 of the external fund managers that we work closely with from the world of global asset management in late June for a Virtual Investment Conference.
Away from equity markets we remain excited about the income opportunities on offer from a range of corporate and consumer credit markets, which is where we continue to focus much of our attention
This event reminded us of the opportunity to make money from developments in sectors such as technology, healthcare, infrastructure and “green” energy. Away from equity markets we remain excited about the income opportunities on offer from a range of corporate and consumer credit markets, which is where we continue to focus much of our attention. We are also enthusiastic about the yields on offer from certain emerging market countries’ debt, where we feel that adequate compensation is being paid for the risks that one takes investing is such markets. In other less well travelled markets, we can still find opportunities to exploit amongst investments in precious metals and commodity markets, which can provide protection against any rise in inflation – a risk which is too easily discounted by markets at this time.
Chief Investment Officer at Punter Southall Wealth
It’s always a conundrum when someone asks us about our view of the market: is this a good time to invest, yes or no?
The honest response will always be that no-one really knows… but unfortunately that’s also the one answer that clients do not want to hear. Many people see it as our job to have a view in this regard – we are investment professionals, after all?
Markets are volatile, and they often move more quickly (in either direction) than even the most astute strategist would be able to forecast with any sort of consistency.
Take the last few months for example: after the most dramatic collapse in equity prices ever, we have now also seen the quickest recovery on record: from an all-time high in the third week of February, to levels more than 30% lower five weeks later, and nearly back to the previous highs only three months after that.
Veteran investment strategist Charles Gave once said that financial markets have been created to make the greatest number of people look like fools for most of the time; he also added that historically they have been very successful at this
Veteran investment strategist Charles Gave once said that financial markets have been created to make the greatest number of people look like fools for most of the time; he also added that historically they have been very successful at this. Probably never more so than the last few months, one might add.
So, is this a good time to invest, I hear you ask once more? With a view to the longer term, my answer is yes… just be prepared to look at least a little bit silly for some of the time.
Chief Investment Officer at Credo Wealth
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.