Apparently, the best way to survive a bear attack is to “stand still and make lots of noise”, things you could argue certain elements of the financial services industry already excel at!
That markets remain vulnerable to huge swings in sentiment should come as no surprise, though tougher conditions could be extra painful for untested models built upon the modern obsession with risk-ratings.
“We believe the period ahead is likely to prove to be one of uncertainty and transition, not unlike the ‘risk-on, risk-off’ period we saw between 2010 and mid- 2012,” says Investec Asset Management’s co-head of multi-asset, Philip Saunders.
“Portfolio resilience will remain a particularly important theme, which requires selectivity in terms of the choice of defensive assets. Among these long-dated US treasuries, the yen and the euro are our current preferences.”
While we no longer have such a severe eurozone crisis to worry about as we did five or so years ago, we do have similar double-dip concerns.
For Kevin Gardiner, global investment strategist at Rothschild Wealth Management, it is still too soon to abandon the “muddle through” assumptions that have been in place since 2009.
“Emotion, not objective analysis, is likely in the driving seat,” he says.
“But this is only partly reassuring: expectations shape markets, and thinking a thing can make it so. Weak markets can stop companies investing, cut access to funds, and deliver the disappointing growth feared.”
According to data from Bank of America Merrill Lynch, global equity outflows since the start of the year at $41bn now exceed the $36bn outflows during August 2015 sell-off, though the figure remains some way off the August 2011 outflows at $90bn when markets were worried about the US debt ceiling.
So, assuming that it could be a good time to reduce equity exposure, where should investors be looking to allocate capital?
Saunders says his team is increasingly seeing value in re-priced assets, most of which were previously beneficiaries of quantitative easing, such as emerging market FX and debt, and high-yield bonds.
He explains: “These are areas that we had been avoiding because we felt that the value was poor and the macroeconomics was very negative and they were intrinsically high risk. But they have moved a long way.
“That’s not to say they can’t move a bit more – there is always that final kick-in that gets you – but they’ve got to a point at which provided you are selective, actually there’s some pretty attractive things to own.”
