Investment Bulletin:
November 2017

This month:

Investors question continued bull market

  Nerves jangle over aged bull market.

  Volatility becomes questionable as a risk measure.

  Confidence in India’s growth story builds.

  UK savers brace for low cash rates to continue.

Featuring this month’s experts:

The Bank of England has raised the official bank rate to 0.5%, yet we are still far away from cash offering an attractive return. Better-looking opportunities do exist – such as Indian equities – but doubts swirl over the risks of several asset classes in case we do revert back to the means.

Here, leading wealth managers from our panel explain which investments are looking highly appealing and which warrant more caution as we edge towards the end of the year.

It’s not too late in the cycle to buy equities

Insights from:

Investment Tips, Expert Opinion

Caroline Simmons, Deputy Head of the UK Investment Office at UBS Wealth Management, says:

As the equity bull market grows older, many people are understandably getting nervous. Among certain groups of investors, the conversation has begun to turn towards the possibility of selling stocks. On first glance, this approach appears to make sense. After all, we are now in the third longest economic expansion and second longest US equity market bull run in modern history. Both the Fed and the ECB are moving gradually toward policy normalisation.

But when it comes to exiting, timing is everything and, as many know from experience, attempting to time the market can be costly. Investors who predicted the 2011 Eurozone crisis would have underperformed a ‘buy and hold’ investor if they were more than 10 months too early. To avoid a similar timing misstep, hedging appears to be the next best option. But direct equity hedging can be expensive.

As old as the market may be, investors should aim to stay overweight in equities, though always within the context of a well-diversified allocation.

It’s our view that investors should remain exposed for now. Firstly, stocks remain attractive relative to bonds. Moreover, equities typically move higher at this stage of the cycle. In the 18 months to six months before an economic downturn, global equities have risen 19% on average. We believe equities actually have the potential to grind higher, supported by a broadening global recovery and rising corporate earnings. The cost of missing out could be high. As old as the market may be, investors should aim to stay overweight in equities, though always within the context of a well-diversified allocation.

Investment Tips, Expert Opinion

Caroline Simmons

Deputy Head of the UK Investment Office at UBS Wealth Management

Don’t over-rely on volatility as a risk measure

Insights from:

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

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

It’s been an extraordinary year. Not only have many asset class returns far outpaced the expectations of most commentators at the start of the year, but nearly every single global asset has joined (stayed at) the party.

At the same time, despite the threats of nuclear war, political shenanigans, shifting central bank expectations, teetering global debt piles and question marks over the future economic potency of the world, there has been absolutely nothing to worry about, if you view volatility measures as an efficient guide.

Indeed, each passing day seems to set new records in absolute levels of volatility and winning streaks of low/no vol. Any time you have even seen the smallest pullback in valuations or price levels there has been a rapid and rabid ‘buy the dip’ pattern. ‘Buy, buy, buy’ is the motto seemingly used across global asset markets.

Our advice on using volatility as a guide to risk is to use it as part of your risk assessment, not the central guide, and to recognise the obvious deficiencies in currently using volatility as a risk measure.

The behaviour that we have seen in markets this year ensure that the questions of is volatility ‘dead’ and/ or is it ‘dead’ as a risk measure need to be answered. From a financial market perspective, I am totally unconvinced that volatility in asset markets is ‘dead’ forever; periods such as we have just enjoyed can go on for a very long time, but ultimately they break. There are enough issues on the horizon to expect a higher volatility regime in the future and if that means losses in financial markets, we will aim to have a lower sensitivity to equity markets than we have had in the recent past. Our advice on using volatility as a guide to risk is to use it as part of your risk assessment, not the central guide, and to recognise the obvious deficiencies in currently using volatility as a risk measure. Is it ‘dead’ in its use? No, but we would suggest it is being discredited and is particularly dangerous at this point to use it as a guide to the future.

Thomas Becket - Psigma Investment Management

Tom Becket

Chief Investment Officer at Psigma Investment Management

Indian equities – Investors lose their fear

Insights from:

China, Currency, FED, Interest Rates, Value Investing

Ernst Knacke, Investment Fund Analyst at Quilter Cheviot, says:

The Indian investment opportunity is not new, and in fact is a relatively consensus investment. The well-known demographic tailwind, a stable political backdrop and a relatively insulated economy combined with recent reforms create a strong foundation to drive a multi-year bull market.

Prime Minister Narendra Modi has not been without luck: oil prices tumbled to a 15-year low through 2014 and ‘15, and he has enjoyed broad support to push through proposed reforms. Nonetheless, demonetisation and the Goods and Services Tax (GST) were brave moves, and Mr Modi pushed both through in quick succession. The GST bill is widely expected to improve data collection, transparency and efficiency in production and consumption, as well as to broaden the tax base. Economists estimate that the new tax bill could add as much as 1.5% to GDP over time. Unsurprisingly, business and consumer confidence are picking up, and a multi-year profit recovery is possible.

The Indian investment opportunity is not new, and in fact is a relatively consensus investment. The well-known demographic tailwind, a stable political backdrop and a relatively insulated economy combined with recent reforms create a strong foundation to drive a multi-year bull market.

However, the corporate earnings recovery has not been as strong as expected. Demonetisation may cause a short-term liquidity shortfall, while implementation of GST will inevitably come with risks. The biggest risk however is a de-rating, as earnings and cash flow multiples are at multi-year highs, while the Indian rupee arguably also has more downside risk than further appreciation potential.

The foundations have been laid for a robust recovery in corporate profitability and sustained earnings growth, but now might be a time to remember Warren Buffett’s famous saying: ‘Be fearful when everyone is greedy, and greedy when everyone is fearful’.

Investment Bulletin, Equities

Ernst Knacke

Investment Fund Analyst at Quilter Cheviot

When will cash offer an attractive return for investors?

Insights from:

Smith & Williamson

Michael Saunders, Associate Director at Smith & Williamson, says:

This month, for the first time since the beginning of the financial crisis, the Bank of England raised the official bank rate from 0.25% to 0.5%. The Governor, Mark Carney has indicated that rates are likely to be raised twice more over the next three years. This begs the question: When will cash offer an attractive return for investors and, more importantly, generate a real (i.e. above inflation) return?

Interest rates on typical bank accounts have been extremely low for a number of years, with many savings accounts not paying an attractive return. Many providers try to combat this by offering high introductory rates to entice customers, after which they tend to drop significantly or have inflexible notice periods. This environment has left investors searching for a return from a wider range of liquid assets, but has the recent increase in interest rates paved the way for better returns from cash in the future?

Certainly, the direction of travel is encouraging. However, despite Mr Carney’s hawkish tones, the rise in interest rates is likely to be very gradual and dependent on a number of macroeconomic and political factors, not least Brexit and the as yet unknown effect this may have for the country over the years ahead.

Beyond tactically raising a cash weighting because of a client’s individual circumstances, it may not be attractive for investors to hold significant cash balances over the long term as the asset class is not without its own ‘real’ inflationary risks.

Additionally, there is still a very large public and private debt burden across the UK and much of the developed world. As a result, interest rate increases are likely to be carefully managed by the Bank of England. It also imparts that the Monetary Policy Committee (the committee which meets for three and a half days, eight times a year to decide the official interest rate in the UK), despite recent rhetoric, is more than likely to wait for inflation to pick up to help erode this burden to ensure the economic recovery can be maintained.

This suggests that real returns on cash are likely to remain low, if not negative for some time. Beyond tactically raising a cash weighting because of a client’s individual circumstances, it may not be attractive for investors to hold significant cash balances over the long term as the asset class is not without its own ‘real’ inflationary risks. Furthermore, it may not be a surprise for readers to hear that, typically, the cost of debt rises earlier and more quickly in rising interest rate environments than the deposit rates received by savers. This is much to the benefit of banks’ profitability margins!

Investment Bulletin, Equities

Michael Saunders

Associate Director at Smith & Williamson

Where will the various markets go if we ever revert back to the means?

Insights from:

Investment Tips, Investment

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

It is remarkable how resilient these markets are. Far be it from us to judge where they may go from here. What we can do though, is look at the risks of various investments in case we do revert back to the means.

Currencies? The euro isn’t at par with the US dollar and sterling hasn’t crashed as many had predicted. We may see a 10% move in any direction, but it’s tough to argue where things will revert to unless we have a new market paradigm, and these are much rarer than many prognosticate.

Equities? There seems to be a lot of downside, purely based on the fact that we have come a very long way from the lows of 2009. And that goes for private equity too. Just because you don’t have a mark-to-market, doesn’t mean there is no risk.

If you own equities, real estate and corporate debt, you are probably in trouble. If you also own real alternatives, i.e. investments that behave differently to the markets, and spread your currencies, you are probably going to be ok and hopefully in a position to buy the lows of the next great bull run.

Fixed Income? Corporate debt will go the same way as equities and government debt is tough to call, as long as the central banks keep printing money and we don’t have inflation.

Real estate? Just look at the price increases over the last 10 years in London, New York or Shanghai. Enough said.

What about hedge funds, venture capital or real assets, including commodities?  Who knows, but assuming a random outcome with a slight skew to the downside seems a fair bet.

What does it all mean?  Well, if you own equities, real estate and corporate debt, you are probably in trouble. If you also own real alternatives, i.e. investments that behave differently to the markets, and spread your currencies, you are probably going to be ok and hopefully in a position to buy the lows of the next great bull run.

Blu Family Office - Christian Armbruester

Christian Armbruester

Chief Executive of Blu Family Office

Why investors should take profit warnings seriously

Insights from:

Charles Stanley - Investment Bulletin January 2019

Will Walker-Arnott, Investment Manager at Charles Stanley, says:  

EY produces a quarterly analysis of UK profit warnings, which is worthwhile reading for any discerning investor. The latest third quarter report illustrates that UK-quoted companies issued a jaw-dropping 75 profit warnings during the period – 21% more than the post-crisis average. The report also indicates that the average share price drop on the day of a warning rose from 15.9% to 17.3% – a signal that markets have become stretched and any disappointments are being severely punished.

We live in an age where there are a plethora of companies coming to market which have disruptive business models and can leave less nimble companies vulnerable. The ‘Amazon effect’ is well known and you only have to look at the recent demise of Toys ‘R’ Us to see how quickly the tide can turn against an incumbent service provider. More recently, we have seen a profit warning from IWG, a provider of serviced office space, which saw its shares fall more than 30% on the day of the announcement. IWG has suffered from a number of disruptive entrants into their market. In particular, We Work has priced itself aggressively in London helped by the incredibly deep pockets of their private backers.

Profit warnings need to be taken seriously by investors and should result in a thorough and immediate review of the holding; investment nonchalance will be punished by unforgiving markets.

Two conclusions come to mind from these recent trends. Firstly, profit warnings need to be taken seriously by investors and should result in a thorough and immediate review of the holding; investment nonchalance will be punished by unforgiving markets. Secondly, these trends point to an improvement in the fortunes of active management providers as the gap between winners and losers in each industry widens.

Investment Tips, Brexit, Expert Investment Views,Investment Tips August

Will Walker-Arnott

Investment Manager at Charles Stanley

Trump – Don’t underestimate his achievement

Insights from:

Economy, Expert Opinion, Portfolio

William Francklin, Portfolio Manager at James Hambro & Partners, says:

Out West they describe people who talk a good talk but cannot deliver as ‘all hat and no cattle’. A year on from his election victory is still too early to assess whether this applies to Donald Trump.

There have been disappointments – from his failure to find a credible alternative to Obamacare to the Mexico wall fiasco. Foreign policy is questionable too. But Trump himself will gauge his success by the performance of markets and his ability to push back on the huge proliferation of regulation that occurred under Obama in the wake of the financial crisis.

Third-quarter results have been very positive with many US companies reporting record profits and a backlog of orders.

Through indirect threats, Trump has successfully persuaded many of America’s most powerful CEOs to rethink plans to outsource jobs abroad. Now he has to persuade them to repatriate trillions of dollars sitting idly overseas in low tax environments and put it to work on American soil.

Third-quarter results have been very positive with many US companies reporting record profits and a backlog of orders.

In terms of reforms, one of the biggest challenges is taxation. He needs to make headway before the year-end as Congress will not do much in 2018 ahead of the elections in November next year. Republicans have control of the Senate by just 52-48, but there are at least five potential renegade Senators he needs to talk round.

Winning power and executing it well are different skills. Trump needs to make friends and make them fast, concentrating on building bridges rather than walls. We do not know yet if he can he manage that.

That’s a mighty fine hat, Mr. President. We’re still waiting to hear the sound of mooing.

Investment Bulletin, Equities

William Francklin

Portfolio Manager at James Hambro & Partners

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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