Matthew Newton Wealth Management Ltd

Senior Partner Practice of St. James's Place Wealth Management


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door knocker

Opportunity knocks

28 October 2014

Growing unease over the pace of global economic growth has triggered volatility in financial markets, but the correction offers some attractive investment opportunities for the well-prepared

Volatility has returned to financial markets this month amid heightened levels of uncertainty for the global economy. Although the ups and downs on global stock markets have unnerved some investors, the recent sell-off is a reminder that short-term volatility is an integral part of investing. Recent financial history also shows that market corrections are often followed by rapid recoveries. Fund managers have reacted swiftly to take advantage of opportunities on offer as they head through these market squalls.

The uncertainty in stock markets has stemmed in part from unease over global economic growth, particularly in the eurozone and China. Fund manager RWC’s Nick Purves, who is the investment manager for the St. James’s Place’s Equity Income fund, believes that market sentiment has not been helped by the European Central Bank’s reticence over the introduction of a quantitative easing (QE) programme. However, despite recent poor data for Germany, the concerns over the eurozone are not new; nor are they for the rest of the world economy. And China’s growth rate may have slowed but is still at an impressive 7%. Crucially, also, the prospects are upbeat for the US economy, which still acts as a locomotive for the rest of the world.

Other factors from Ebola and conflict in Ukraine and the Middle East to a stronger dollar, the approach of the end of QE and a sharp fall in oil prices have weighed on investor sentiment since September. But the reaction has been different across markets. European stocks have been hit harder by the growth fears. The UK stock market has been hit by the fall in mining and oil & gas stocks as commodity prices tumble. Defensive stocks, such as consumer staples, however, have performed well.

Safe havens

Prices have not fallen across all assets, unlike the ‘taper tantrum’ of May 2013 when investors reacted to the US Federal Reserve’s then chairman Ben Bernanke raising the idea of gradually reducing or tapering QE. Investors who have sought sanctuary in assets other than equities have moved into the perceived safe haven of government bonds – German and Japanese as well as Treasuries – when last year they went into cash. Well-diversified investors will have gained on the uplift for fixed-income and property assets to help offset the dip in equities.

Robert Wyckoff of US fund manager Tweedy, Browne acknowledges that the downward movement of stocks since mid-September is significant, but is confident that the development is no more than a correction. “We do not yet believe that the corporate world is on sale,” says Wyckoff. But he does see opportunities in the recent sell-off (although he cautions that these opportunities have not dramatically increased). “Should the recent volatility continue, our job of uncovering stocks with acceptable levels of discount should get easier,” says Wyckoff.

Fund manager Magellan’s chief executive Hamish Douglass, the manager of the St. James’s Place International Equity fund, highlights that US equities have outperformed their European counterparts in recent months as the dollar has strengthened. (Douglass’ decision in August to increase his cash weighting has also been advantageous.) “While equity markets have fallen in recent weeks, they remain roughly flat since the start of the year,” adds Douglass. Markets are now waiting for an increase in interest rates. Although Douglass believes that markets have not yet fully reflected the prospect of higher US interest rates, with supportive influences in place, he remains confident for equities in the long term.

With global markets back in correction or near-correction territory, fund manager Burgundy’s Kenneth Broekaert, the portfolio manager of the St. James’s Place’s Greater European Progressive fund, comments: “Although stock market volatility isn’t much fun for private investors, those who have planned for it need not fret.” In fact, portfolios that have taken this inevitable risk into account can weather and capitalise on the bumps along the way. Broekaert points out that one way to insulate a portfolio from market declines is to make sure that short- and medium-term cash needs have been segregated properly from long-term investments.

Cash pile

Purves of RWC has been building up cash within his portfolio for a while. “We had become concerned that valuations in some areas of the market were looking toppy,” he explains. “This of course begs the question as to when we should start to put this cash to work. This decision will only be based on the attractiveness of individual companies and not a short-term view on the direction of the market.” Purves is now looking to identify what he describes as “relatively robust” businesses, with attractive valuations. “That’s when we will use any market turbulence as an opportunity to invest,” says Purves. October looks to have stirred up plenty of opportunities.

The information contained above, does not constitute investment advice.  It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate risks, consequences and suitability of any prospective fund or investment. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.



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