taking on the added risk
of investing significantly in
banks. While the yields may
look exciting, the downside
risk is not. High yield
bonds in particular look
good value and I am
comforted that traditionally
cautious strategic
bond fund managers
such as M&G’s Richard
Woolnough and Fidelity’s
Ian Spreadbury see compelling
opportunities in
this area of the asset class.
l UK equities
UK stock-market valuations
show that, in many areas,
shares are being priced
by fear not fact at present.
The FTSE All-Share Index
looks cheap versus history
on a number of valuation
measures and it is yielding
an exceptional 3.5% – over
1.5x that of gilts. While
we expect the climate for
companies to be tough in
2012 and there will be
downgrades, UK equities
appear to be pricing in a
deep global recession, not
the anaemic growth that
economic figures are currently
suggesting.
If the climate improves
considerably, then there is
little doubt that distressed
areas such as banks and
cyclical areas such as
miners will reward investors
in a ‘risk on’ phase.
But given uncertainty,
I see little reason to be
that brave with compelling
opportunities in more
stable areas of the market.
Although I do not think
we are in for the severe
recession many risk asset
prices suggest, I am not a
raging bull and it appears
inevitable that the economic
backdrop is going
to remain challenging. As
a result, a solid defense
is key, with a focus on
defensive sectors that are
less reliant on the strength
Point of maximum financial risk
of the economy.
With deleveraging set
to continue for quite a
while, companies that
can increase profits and
dividends almost regardless
of economic conditions
will come to command
a premium to the
market. Surprisingly, many
UK blue-chip stocks that
offer dependable growth
prospects together with
decent and growing yield
are cheap relative to the
wider market.
This is not how it should
be and I am convinced that
such areas of the stock
market are undervalued.
l Global equities
Across international markets,
it makes sense to
maintain a focus on global
leaders that are best placed
3 poorest-performing IMA sectors – 1 year
%
20
100
0
-100
Point of max financial risk
“Wow, am Euphoria
Are we somewhere in here?
I smart”
Thrill
Anxiety
Denial
“Temporary setback –
I’m a long-term investor”
Excitement Fear
Desperation
Optimism
Optimism
Panic Hope
Relief
“How could I have
been so wrong?”
Capitulation
Despondency
Depression
Point of max financial opportunity
Source: Whitechurch Securities
Asia Pacific
ex Japan
-20 0
Global emerging markets
Dec ’10 Feb ’11 Apr Jun Aug
Source: Morningstar
to take advantage of growing
areas of the global
economy, while being
financially strong enough
to offer resistance to possible
shocks in the economy.
Even with the downgrades
we have seen, the
consensus for global GDP
growth is around 3% to
3.5%. It could get worse
but we are still talking of
a global economy that is
growing rather than contracting,
and this provides
plenty of opportunities.
But the core of our global
equity strategy remains
focused towards exploiting
the shift in global economic
power away from the
US-led Western economy
towards Asia and emerging
markets. It will undoubtedly
be the rapidly growing
middle class in the
emerging markets that will
Europe ex UK
CONTRARIAN RISK ASSETS
JANUARY 2012 [www.portfolio-adviser.com] PORTFOLIO ADVISER
Oct
Dec
drive consumption over
the next decade. China’s
middle class is estimated
to increase from 150 million
to over 400 million
by 2020. It is realistic that
this could lead to a decoupling
of the two-speed
global economy over the
coming years.
According to Goldman
Sachs, the rebalancing of
wealth means that by 2050
over 50% of global GDP
will be generated by BRIC
countries, with China at
the forefront. Yet China’s
stock market (including
Hong Kong) still only
makes up 3% of the MSCI
World Index.
l Stick with the East
While risk aversion and
inflation concerns have
seen Far East and emerging
markets out of favour
in 2011, we will remain
overweight for growth
investors with a long-term
perspective. It is our belief
the crisis of doubt from
Western investors has seen
these markets looking
oversold, and a number
of fund managers are now
seeing compelling valuations
in China and other
emerging markets.
While the volatility
attached to these markets
is a necessary evil, focusing
your investment portfolio
on risk-averse assets in
the moribund West could
be a dangerous long-term
strategy to pursue.
I am cautiously optimistic
for 2012, believing that
fear-based mispricing of
risk assets offers enticing
opportunities across many
markets. Volatility will persist
but this will provide
the best opportunities for
those with a long-term
perspective who can take
heed of Warren Buffet’s
words to “be greedy when
others are fearful”.
SUMMARY
The current equity and
bond volatility will continue,
resulting in a great deal
of continued asset class
mispricing.
Just because an asset has
been a safe haven in the
past does not mean it will
be in the future so investors
need to have a broad frame
of reference amid such
uncertainty.
But while volatility persists,
long-term contrarian and
‘greedy’ investors should be
able to see great opportunities
where others ‘fear’ to tread.
“
Although I do not
think we are in for
the severe recession
many risk asset
prices suggest, I am
not a raging bull and
it appears inevitable
that the economic
backdrop is going to
remain challenging
”
35
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