Five investment insights for the next month
1. Uncertainty (and therefore) opportunities ahead – 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.
“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.However, in times of uncertainty, it’s important not to bury your head in the sand.
“Understanding your risk exposure 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.”
2 – Digesting what US economic data means for markets – Daniel Adams, investment analyst at Psigma, says:
“ Encouragingly, a lot of the economic fears that manifested in August seem to have receded a little. Investors have become less concerned about China, commodities appear to have found some form of a floor and corporate results were better than many had feared. Equities, particularly in the US, have now recovered nearly all their losses experienced from the recent lows.
“The difficulty for investors will be digesting US economic data and interpreting what this means for 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 the Santa Claus rally that typically greets us every year hasn’t turned up too prematurely.
3 – Is there still value in shares? – John Redwood, chairman of the investment strategy committee for Charles Stanley Pan Asset, says:
“It has 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.
“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. 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 the world will expand around 3% again this year, and can continue growing next year as well. Chinese growth has been brought lower by the 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.
4 – Tread carefully, but no need to panic – Rosie Bullard, portfolio manager at James Hambro & Partners, says:
“We are treading more carefully but we do not see a need to panic. We remain overweight in 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.
5- Red flags for investors in real assets – Giles Rowe, chief executive and chief investment officer at Henderson Rowe, says:
“Commodity trader Glencore’s CEO, Ivan 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.
“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. 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.”