Monday, 8 February 2016

Ideas for long-term investors concerned about market volatility

Following a turbulent start to 2016, these long-term investment ideas can block out the noise of several concerns. These include the slowdown in China’s growth rate and the fragility of its financial system, the rout in oil, gas and industrial commodity prices, the prospect of defaults in US high yield bonds, concerns about the solvency of European banks and uncertainty around the UK’s forthcoming “Brexit” referendum.

While we went into 2016 with a cautious outlook and believe the current volatility could continue for some time, we also believe that recent declines make for a far more attractive entry point for long-term investors. No one knows how long this current turmoil will continue but history suggests that markets tend to overshoot on both the way up and the way down. We are close to a point where the exodus out of equities is herd-like rather than driven by fundamental factors.

There are a number of solutions that investors might consider this quarter. In volatile markets, absolute return funds should be high up investor’s radars to both help reduce overall portfolio volatility and enable them to back managers who can utilise a wider set of tools to deliver returns. For investors looking for a strategy aimed at generating positive returns that are not dependent on general market movements, we favour multi-strategy targeted absolute return funds. 

For equity investment consider Europe. While we think the year could remain a volatile one for equities, Europe is our preferred equity market at the moment as the policy environment remains very supportive for shares. The European Central Bank has adopted negative interest rates and is already engaged in a QE stimulus programme which it may well accelerate. Furthermore, low energy prices are also a positive for Western Europe, as a net importer of oil and gas. 

In uncertain times back big brands. With the global growth outlook weakening, there’s a strong case for focusing on high quality brands, as these business typically command loyalty that can prove resilient through the economic cycle and which provides a high barrier to competition.

Play a defensive game in the UK. Many British investors naturally gravitate to UK funds, but the road ahead could be rocky, with the upcoming Brexit vote generating uncertainty. This is most likely to be felt in sterling, which has already weakened in recent times, and in Foreign Direct Investment, but don’t forget that the UK equity market is very international in nature and not particularly reflective of the domestic economy at all. Ironically a weaker pound could help massage UK-listed company dividend pay-outs for sterling investors, as many UK-listed firms earn most of their revenues outside of the UK.

Could Asia/emerging markets be the “wild card”? We’ve been particularly cautious on Asia and Emerging Markets for a long time now, as they have faced significant headwinds both from the slowdown in China but also as the dollar strengthened in expectations of a US rate hiking cycle which has made the costs of servicing dollar denominated debt, very painful.

Yet we may now be nearing a point where so much negativity is priced in, that these markets could be the “wild card” for 2016, for bargain hunters. While these markets have looked “cheap” for some time, we think that market expectations of a normal US rate hiking cycle are rapidly evaporating and there is even a chance of further easing. A weakening Dollar will provide a relief to these markets but set against this is the risk of a further deterioration in China and a deeper devaluation of its currency.

As always seek advice where appropriate.

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