Markets have been buffeted by almost constant bad news over the past month and this past week has been particularly dire as investors reacted to the ongoing European sovereign debt crises, the drama of the US’s debt situation and poor economic figures in the developed world. It’s been a tough summer and an even tougher week.
Still fund managers, ever the optimists, are viewing the whole situation with an eye to the value it has created. Threadneedle’s chief investment officer Mark Burgess says the group’s multi-asset funds reduced their equity exposures at the beginning of the week but they intend to re-invest now. “I do not know if this marks the low of the equity markets, but I do know that valuations are low and companies are strong financially.”
Burgess points out the dividend yield of UK equities is now 1% higher than on 10 year gilts, a valuation anomaly he says he has never seen before. “Hence we are buying some UK equities this morning.”
European equities
It’s the politicians to blame for the continued volatility of the European markets, according to some fund managers. Companies still look sound, as do some individual markets not caught up in sovereign debt crises, yet European equities are sliding as investors lose confidence in the entire region.
Fabio Riccelli, manager of Fidelity’s European Dynamic Growth Fund, says investors need to remember Europe is a heterogeneous region and there are areas that are growing strongly, such as Germany and the Nordics. Europe has many ‘global leaders’ in sectors as diverse as luxury goods, healthcare and industrials which the fund is overweight in.
Fidelity’s European managers recommend a focus on high quality companies with sound business models, which may be better suited to survive the current storm.
John Ventre, portfolio manager at Skandia, also points out that European equities are trading at 8x forward earnings and 4x forward cash-flow. “Cheap by any measure, but bargain basement next to 10 year German bunds at 2.4%. Ultimately European equity markets are very oversold, as are equity markets generally. I’ve been keeping plenty of powder dry waiting for an opportunity like this, so for me its time to put money to work.”
Corporate debt v sovereigns
As has been the case for some time, bond managers still prefer high yield and corporate debt over government issuances. The recent volatility in Spanish and Italian sovereign paper is certainly evidence they may be right. However, the rush on gilts this week shows investors are not quite convinced.
Performance in the IMA gilt sector does not do much to dissuade either. Over one month to 4 August, gilts funds have vastly outperformed every other IMA sector, up 4.20%, FE data shows. Index-linked gilts, up 3.91%, is the second best area.
However, as it has been said many times this year, and likely still holds true, strategic bond funds are well suited to the current volatile and rapidly changing market conditions as managers are able to move around and find opportunities which direct investors or other funds can’t.
A case in point is the Fidelity Strategic Bond Fund managed by Ian Spreadbury. While diversifying his gilt exposure, Spreadbury is also holding a number of credit default swaps for a range of countries to protect against a sovereign default.
JP Morgan’s take on fixed interest is to run lower risk positions, be defensive, reduce long duration and wait – re-deploying cash when life looks a bit better.
Emerging markets
Considered to be the one shining hope for investors powering the global recovery, recent volatility shows emerging markets aren’t necessarily a safe haven when the rest of the world struggles.
FE data shows funds in the IMA’s GEM sector have fallen an average of 6.82% over the past month to 4 August and are also in negative territory over the slightly longer three and six month periods.
JP Morgan points out that EM equities are one of the worst performing asset classes this year, demonstrating the region has not necessarily decoupled from the developed world.
Where to now?
There’s no denying it looks to be a scary time for investments. Perhaps advisers can reassure their clients with the same optimistic outlook managers have, but then they are typically always looking on the bright side for their respective asset classes.
The AIC on the other hand is pointing out investors should once more look to phased investing, drip feeding money into the market to avoid the big volatility hits and benefiting from the low valuations.
Whatever happens from here, it is perhaps worth reminding your clients of the strong market rises typically seen following substantial falls. As is often the case, investors, particularly retail investors, get too caught up in the short-term worries and forget the longer-term advantage of investments and the diversification of funds. In fairly grim times like these it is probably worth remembering those positives.
