Inflation risk is top of the agenda, but investors can proactively protect their portfolios by considering commodities and infrastructure - particularly if they choose specific kinds.
Interest rate expectations shake things up.
Equity investors advised to hold their nerve.
Japan and Europe present profit opportunties.
Red flags emerge for real assets.
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Looking ahead to November, the fortunes of equities and commodities are top of the investment agenda, along with ongoing worries about US economic data and an impending rate hike from the Fed.
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
As we coast into the festive season and with markets having calmed after the late summer and autumn volatility, we ask ‘Where next?’ Are we experiencing a period of low volatility ahead of another possible lurch lower, or a slow but sure grind higher?
Market, and therefore human, behaviour is interesting to observe as we tend to like slow but steady moves up but get very frightened when everyone heads for the exit at the same time when markets plummet. We all say to ourselves ‘I wish I had bought on that dip or invested when a particular market was at a low’, but actually doing that is much harder than just thinking about it. Likewise, when markets reach a new high, we admonish ourselves for having not taken some profit when the security in question has declined again.
The fact is nobody knows when it is best to buy or sell – or indeed stay on the side-lines. Forecasting is a lonely occupation and I for one gave up trying to make predictions a long time ago. Will oil go up or down? Has gold reached a price bottom yet? Is the Chinese stock market beginning to show signs of stability? Who knows? Not me.
Amid such uncertainty, it’s important not to bury your head in the sand, however. Getting a professional assessment of how your risk exposure stands is key if you want to pursue a get rich slowly – rather than a get poor quickly – strategy. That said, while the focus is now on the possible downside ramifications of a December rate hike from the Fed, this could also throw up interesting opportunities for investors too. It’s worth talking to your adviser so you can be poised to seize any which might suit your objectives.
Co-Founder of findaWEALTHMANAGER.com
Daniel Adams, Investment Analyst at Psigma, says:
The re-pricing of interest rate expectations in the last week has added that ‘uncertainty’ factor back into markets. Some commentators are suggesting that the Federal Reserve is genuinely looking to raise rates at their 16/17 December meeting, providing that various caveats are met. Others suggest that the reason for the more hawkish tone was to eliminate the ‘lower forever’ mentality that had crept into markets in the past month, with rate hike expectations beginning to shift from March to as far out as June 2016. Encouragingly, a lot of the economic fears that manifested in August seem to have receded a little. Investors have become less concerned about China, following further loosening of monetary policy and generally less poor data. Commodities appear to have found some form of a floor. Corporate results on the whole have been unspectacular, but better than many had feared. Equities, particularly in the US, have now recovered nearly all their losses experienced from the recent lows. Finally, we can also add to the mix the uncertainty surrounding the US debt ceiling that once again reared its ugly head earlier this month, plaguing markets. If recent noises out of Washington are to be believed, then this has been ‘agreed in principle’…
The difficulty for investors will be digesting US economic data and interpreting what this means for markets.
With markets back towards the top end of their recent trading range, on the premise of ‘lower for longer’, will improving or indeed deteriorating data be taken as good news or bad news by markets? We expect the whipsawing of investor sentiment to remain a feature of markets for some time to come and we do not believe that it is sensible to be aggressively positioned heading into this uncertain period. However, where we do believe we will be more aggressive, probably more so than in the past, is through being increasingly active and taking advantage of any violent swings in sentiment. At present, we remain as balanced as we have been for some time, hoping that the Santa Claus rally that typically greets us every year hasn’t turned up too prematurely.
Investment Analyst at Psigma
John Redwood, Chairman of the Investment Strategy Committee for Charles Stanley Pan Asset, says:
It’s been a cruel summer for share buyers. The sharp falls in China sent shockwaves around the world. Another phase of the Greek crisis did not help the Euro area. Many worried that world growth was slowing too much.
The main point of buying and holding shares is to hitch a ride on growth. If you put money in a deposit account and interest rates stay low, or if you buy a normal bond which just pays the same low rate of interest all the time you own it, you know you are not going to get much of a return on your savings. In this current low interest rate world in all the main advanced economies you need to take more risk if you seek a better return. That’s why it comes hard when all those old warnings about equities come back to haunt you. Shares can and do go down as well as up. You can lose money in a short time period.
Shares should work over long time periods because they give their owners participation in the growth of turnover and profits of the companies they invest in. You usually buy a portfolio of shares, as individual companies can get the markets wrong, can lose money even during good periods of an economy, or can go bust losing you all your investment in them. Buy a portfolio of shares, a representation of the whole population of companies, and you will experience more of the general growth in an economy. The problem this summer was people stopped believing there was much growth left in China. As China has been accounting for a large proportion of the total growth in the world, this came as a blow to investors.
It looks more likely that the world will expand around 3% again this year, and can continue growing next year as well. Chinese growth has been brought lower by tight monetary action taken some time ago to curb price rises and property prices especially. Now the Chinese authorities are keen to promote growth again. Inflation is under control. They are busy cutting interest rates and relaxing their grip on new credit from banks. We should start to see some improvement in China next year.
All this suggests to me shares can give you a return if you buy them when markets are in a panic, as they were at the end of September, and hold on for better times. In a world of low inflation and very low interest rates the possibility of buying shares on a modest dividend income that will grow with the economies is about the best you can do. You just may need to be patient and have good nerves when markets worry too much, as they did this summer.
Chairman of the Investment Strategy Committee for Charles Stanley Pan Asset
Rosie Bullard, Portfolio Manager at James Hambro & Partners, says:
October saw markets rebound sharply, perhaps a sign that, while the path of interest rate rises was still unclear and the outlook for China remained mixed, markets had overreacted during the summer months.
We also saw a significant reversal in the performance of commodity stocks as investors appeared to close out short positions and took comfort in the cost-cutting measures being implemented by management teams. In addition, investors were reassured with the confirmation of dividend support continuing and, therefore, the idea of being ‘paid to wait’.
As we said last month, we are treading more carefully, but we do not see a need to panic. We remain overweight cash and have a preference for a greater proportion of absolute return vehicles to dampen equity market volatility.
This does not however mean that we are selling out of equities aggressively as we still see value in risk assets. We maintain our preference for Japan, where earnings revisions remain positive and monetary policy is still accommodative.
Europe continues to be of interest too, as again the European Central Bank remains supportive and we have identified a number of specialist niche companies in the region. Technology remains attractive to us from a thematic perspective, as does income, though we are ever conscious of valuations.
Portfolio Manager at James Hambro & Partners
Giles Rowe, Chief Executive and Chief Investment Officer at Henderson Rowe, says:
Commodity trader Glencore’s CEO, Victor Glasenberg has discovered that trying to offload a mine in a buyers’ market is harder than shifting inventory for commission. He had been trying to build a better positioned and diversified portfolio with an oil and base metal hedge.
Most analysts predicted these would rise on the back of a Chinese recovery in 2015. Instead the whole commodity market followed oil’s descent, taking mining asset prices with it. Last month’s monster fall in Glencore’s share price was driven by liquidity and solvency worries, not just by commodity prices. Of course Mr Glasenberg did not help by conceding that he was unable to read China’s economy. Estimates of Glencore’s liabilities now range between $30bn and $100bn, with uncertainty over derivative and counterparty exposure.
So Glencore’s recent sell-off was self-inflicted and driven by complexity, overconfidence and bad communication. There are only two certainties about commodities: they are very cyclical and they tend to be self-correcting. It is almost impossible to time the top and bottom of any market so investors should focus on avoiding poor management teams and excessive leverage. It was just a year ago that Rio Tinto rejected Glencore’s merger offer citing lack of synergies and very little upside for their investors. In fact while BHP Billiton and Rio Tinto were trying to reduce debt and simplify their business, Glencore was taking on leverage and acquiring non-core assets. One thing to remember about leverage is that it can turn a good investment into a bad one, but it will not turn a bad investment into a good one. Even if the trader is right in the long run he faces ruin in the short run if he has too much debt.
When investing in commodity companies, one should not try to predict the price movement in the short to mid term. Pay attention to balance sheets and stick to companies with assets in politically stable countries to have a chance of surviving volatility. We are still underweight commodities and see a volatile sideways range as the most likely scenario. Being cyclical, we expect commodities to make a firm comeback only when excess capacity disappears, and this means closures or a demand pickup.
Property’s rise is linked to general economic recovery and, like commodities, is a class fuelled heavily by debt. We hold both via listed equity. We still like a number of property stocks with low gearing, reasonable Price to Book ratios, and commercial strategies in areas of high demand. We currently hold a retail infrastructure stock, one in construction and support services, two in logistics and one in housing. Gearing ranges between 60% and 18%, and as a group Price to Book is 0.9x. Yield ranges from 6.6% to 1.5% and we see all as offering value at reasonable risk.
Chief Executive and Chief Investment Officer at Henderson Rowe
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.