Volatility ripped through stock markets in the first two months of the year and despite recovering their losses towards the end of March and into April, equities still look as though they’re in for a rocky ride as investors react to geopolitics, macro events and central bank policies.
What’s the play on equities in 2016?
Convergex said of equities in a research note put out in early April, that “while future performance remains unclear… history tells us that 2016 will likely be a big year–one way or the other.”
Rebecca Hampson, Associate Editor at ETF Strategy talks to three ETF investors to get their views on equities in 2016.
Steven McGregor, chartered wealth manager at Price Bailey Portfolio Management:
[Volatility in equities] is likely to increase risk, but will also create opportunities for those who stick to a long-term plan and remain disciplined in their approach.
We believe investors are better off sticking to their long-term investment goals and riding out short-term market volatility, rather than trying to time their trading to coincide with the peaks and troughs of the market which can be akin to catching a falling knife.
The future is always uncertain. There are always unexpected events. Some will turn out worse than you expect; others will turn out better. The only sustainable approach to that uncertainty is to focus on what you can control, such as the costs of the investments you choose and regular rebalancing of your portfolio to keep it in line with your long term objectives.
We think investors should stay broadly diversified via low cost instruments such as ETFs and, with the help of an adviser, set an asset allocation that matches their own risk appetite, goals and circumstances.
Ben Seagar-Scott, senior research analyst at investment management firm Tilney BestInvest:
I think equities, along with many – dare I say most – other risk assets, have had their prices distorted by an extended period of excess liquidity, which has most recently been propagated by quantitative-easing polices, but has been in evidence since well before the global financial crisis through the easy credit conditions of the noughties. As a result, whilst the last few years have generally been very kind to equity investors (aside from those in Emerging Markets), storm clouds seem to be gathering on the horizon, and that makes me increasingly cautious.
Through last year we embarked on a steady de-risking of the portfolios we run, reducing equity exposure in favour of alternative assets and tactical cash, and also positioning our equity exposure more defensively.
Arguably our two chief concerns are that the unwinding of the huge debt burden that China has built up, and the risk that markets lose faith in Central banks, and recognise that QE is not the economic panacea that many still believe it is. That said, although we can identify a number of growing concerns, timing such events is exceptionally difficult, if not impossible, so we haven’t totally headed for the hills.
Within a broad underweight to equities, we’re favouring European equities, since liquidity from QE is generally supportive of equities even if it has little direct economic impact. Against this, we are underweight in the US where we see the US Federal Reserve hike was a policy error and we could see margins becoming squeezed and revenue growth come under-pressure, which is a particular concern given valuations look expensive. We’re also underweight Emerging Markets and Asia Pacific equities on worries over China. Markets may have fallen, and some may consider it cheap, but whilst you can attempt to discount a general slow-down and ‘soft-landing’, if the country finds itself with significant problems in its financial system, the potential market impact could be much more severe.
Colin McInnes, managing director at bespoke discretionary management firm Quartet Investment Managers:
Markets will remain very volatile and it is likely we will see equity markets have another shake out. However, there are areas for equities that still look OK – Japan and pockets of Europe look to offer better value.
We believe that fixed interest will do rather well because of rates not going anywhere and it will work as a hedge to equity volatility. We also believe that certain parts of property and infrastructure could also do well. It is also likely that small cap will outperform large cap.
But this year is going to be about grinding out some returns.