Markets continue to rise, but pockets of value certainly still exist in certain equities, alongside a number of both corporate and government bonds.
Asian value opportunities spark interest.
Inflation shows green shoots.
Corporate bonds expected to outperform sovereigns.
“Watch and wait” strategies seem wise.
DIY investors may well be struggling to decide what action they should be taking to minimise risk and maximise returns.
In this March 2017 issue of Expert Investment Views, leading professional investment managers tell us a little about how they are positioning their clients’ portfolios amid buoyant markets, yet continuing geopolitical shocks.
Tom Becket, Chief Investment Officer at Psigma Investment Management, says:
All the talk of the nascent Year of the Rooster in China has meant the doomsayers have taken the opportunity to discuss all the negative factors in the Middle Kingdom. However, we would encourage our clients to keep a more open mind on this divisive subject and to recognise that as well as the risks that China offers, opportunities also exist. Such an approach was richly rewarding last year, as emerging market assets contributed handsomely to our returns. After a strong year, we have reassessed ongoing potential for returns from Asian equities.
Clearly as we enter the Year of the Rooster there are, as always, lots of things to stimulate fear and excitement over China. Our take is that it has got to be right to be balanced. Growth potential in Asia is picking up after a lull over recent years and, importantly for investors, companies seem well-positioned to translate economic growth into shareholder returns.
The good news is that certain cyclical sectors in Asian equities remain cheap, even after last year’s rally. We are also attracted to some of the high-quality consumer sectors, which lagged the strong move in Asian markets last year.
Of course, risks also remain and we have to always admit to only knowing part of the picture with regards to what is happening within the Chinese economy; this is the key reason that we remain balanced rather than outright bullish or bearish.
There appears to be a good opportunity to exploit long-term growth at attractive valuations; that equation seems far simpler to us than guessing the next steps of the Trump administration, the Chinese government or indeed a round of ‘word association’.
Chief Investment Officer at Psigma Investment Management
Giles Rowe, Chief Executive and Chief Investment Officer at Henderson Rowe, says:
Declining interest rates have been the defining feature of markets since the fall of the Berlin Wall, so the possibility that globalisation is about to be dismantled looks a genuine threat to prosperity. One must surely wonder, is it time to abandon equities and bonds, buy gold and bury it?
But Bloomberg still shows $12 trillion out of the total $64 trillion government bonds in issue sporting negative yields and despite recent gyrations, the jury remains out on a fundamental investment regime change. Yields have not broken up from their massive down trend. Our portfolios remain overweight equities, have benefitted from a general upgrade in US stocks but still have a spread in emerging markets, Asia, Japan and Europe. Our bond portfolios are a mix of short- to medium-term corporates and medium-term Treasuries, with some inflation-linked bonds in the UK and around the world. The dollar will have a hard time weakening if Mr Trump cuts the US trade deficit, so we are keeping our dollar bonds for now.
A degree of inflation is at last emerging. For example, the UK Producer Price Index was up 3.5% and Manufacturers’ Input Prices rose an eye-watering 20.5% year-on-year in January. The deflation threat has gone for now, but is everything rosy? The cloud on the horizon is the return of ‘hope’ to equities, in the form of wild expectations of the benefits of US tax cuts, for instance. Given the adage that markets climb a wall of worry but go down a slope of hope, we would prefer more ‘worry’ if possible and the headlines to remain gloomy for a while. Keep tweeting please, Mr Trump.
Chief Executive and Chief Investment Officer at Henderson Rowe
Alex Scott, Deputy Chief Investment Officer at Seven Investment Management, says:
What a difference a year makes! A year ago, investors were in panic mode, still battered by the shock of the Chinese devaluation in August and seeing new terrors around every corner. Equities were under strain and the riskier credit markets under acute pressure, with spreads pricing in extreme levels of default. Dozens of reasons were touted for the market weakness – from an impending Chinese economic collapse, to the decimation of the oil industry and defaults by oil-producing nations, to a US recession – and all the implications these could have globally.
Our analysis suggested lots of these suppositions were way off the mark and, by and large, there has been no end (as yet) to China’s growth or the US upswing. But the experience is a very sound reminder of the psychology and perception of markets. Consensus fears can be misplaced, what seems impossible can spring a surprise, patterns of events don’t always repeat as we expect, and the market pricing of risk is not always as efficient as we would like to believe.
Today, the consensus is more relaxed about economic risk and centred on political risk – unsurprisingly, given the seismic political shocks of Brexit and Trump. But we should remember the lessons of last year, particularly if the political risks envisaged don’t actually materialise. But even if the consensus is right, we must still keep questioning and remain mindful of the times where it can be very wrong indeed.
Deputy Chief Investment Officer at Seven Investment Management
Karim Alwan, Investment Advisor at SGPB Hambros, says:
Following President Donald Trump’s election, the market has hailed what is now referred to as the ‘reflation’ trade which gained momentum into the New Year, taking market indices to new highs. Whilst the strong initial momentum has somewhat stalled, we believe that the macro backdrop is still supportive of better corporate earnings and we remain globally positive on equities. However, selectivity remains key as forward valuations are stretched compared to historic norms and better opportunities to add to positions may arise. With US equities still expensive, we believe that better valuations in the eurozone and the UK argue for outperformance.
On the fixed income side, with deflation fears easing and the Fed normalising policy, we expect modest upward pressure on yields, keeping us underweight sovereigns. However, we are mindful that the secular drivers for low rates should remain in place, thereby limiting the upside. We still expect corporate bonds to outperform sovereigns, although selectivity should again be stressed as the recent rally in eurozone high-yield, for example, warrants a more neutral tactical stance.
Emerging bonds remain an attractive source of yield, but durations should be kept low. For investors focusing on inflation, USD and GBP inflation-linked bonds still provide some protection against rising consumer prices, but stretched valuations – especially in the UK – limit upside potential. We have also seen increased interest in floating rate notes, which provide an unconditional floating bonus linked to a reference rate (e.g. GBP or USD 3-Month Libor) that is floored at predefined levels and can also be capped to enhance returns.
Investment Advisor at SGPB Hambros
Nigel Cuming, Chief Investment Officer at Canaccord Genuity Wealth Management, says:
Global financial markets still offer a seemingly positive story – the outlook for growth is positive and equity markets are reaching new highs. Fortunately for investors, none of the fireworks in the political arena over the past 12 months have seeped into markets.
But there’s a noticeable absence of the ‘irrational exuberance’ that normally marks the top of financial markets, which signals nerves. So many investors are watching and waiting. And for our clients, we are doing exactly that.
Global equities continued their winning streak in February, but we consider most to be overbought. Low-level volatility suggests that investors are complacent to medium-term risks. Investors might be looking at President Trump’s anticipated fiscal stimulus measures through rose-tinted glasses and not paying attention to the fall out of any protectionist measures he might introduce.
European and emerging markets are not over-valued, but it is still too early to buy them. With the cloud of Greece’s sovereign debt and upcoming European elections, it’s best to wait before increasing any European equity exposure. And emerging markets wait on tenterhooks for Trump to tinker with trade deals – much emerging market growth is export-led.
It’s the same for UK equities – as the date for triggering Article 50 looms, who knows what the upshot will be? So we wait.
Although we are moderately bullish towards risk assets on the back of a gently improving global economic backdrop, we are mindful of potential risks. Before we commit further funds to the equity markets, we will continue to explore alternatives along with a broadened range of products for clients. So, we continue to watch and wait to ensure we are well placed to react swiftly as more of the picture comes into view and opportunities arise.
Chief Investment Officer at Canaccord Genuity Wealth Management
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.