A long term buying opportunity has opened up in equity markets following the recent sell-off, according to AXA Wealth’s Adrian Lowcock (pictured), who advises against charging back in but says there are rules investors can follow to take advantage.
The chances are you have probably seen a large portion of your portfolio go down over the past three weeks or so with the New Year so far seeing investor sentiment go from bad to worse thanks to further pain from the Chinese market and a continued rout in the oil price.
Most risk-assets are in negative territory with mostly just safer fixed income funds making money. The FTSE 100 reached a three year low at the close of last week and has made little ground in today’s trading. Things are now even worse than at the nadir of last year’s market falls on August’s ‘Black Monday’.
Price performance of index over 3yrs
Source: FE Analytics
However, investors can benefit from these perilous times, according to Lowcock, who thinks there are some good opportunities for the longer term investor within a market that is displaying increasingly short-term behaviour.
“2016 has got off to a bad start and the bears are out in force. The list of concerns has been building up causing markets to fall. Currently markets are more focused on the short term and reluctant to invest until they can see an improvement in the markets.”
“However investors should look beyond the short term volatility. By focusing on their goals, such as saving for retirement, they can make investment decisions based on the longer term and ignore the noise.”
“Selling now, after the FTSE 100 has fallen 18 per cent from its 2015 peak (27th April) means investors might be selling after the event. Whilst trying to buy back in before markets recover, when confidence is low, is likely to prove even more difficult.
Price performance of index since 27 April 2014
Source: FE Analytics
First he recommends avoiding the temptation to try to time markets which he says can be “damaging to your wealth”. Instead be advocates ‘topping up’ investments at lower prices incrementally.
Thinking longer term could also lock in some cheaply valued investments, he says, as long as you have a suitable investment horizon.
“Most professional investors are looking very short term at present as they wait for some direction. Individual investors don’t have to report short term performance and can afford to invest for the longer term. Think about when you need the money and why you are investing.”
Secondly, he says investors should consider adding to their investments to take advantage of the lows.
“It is difficult to convince yourself to top up your investments at a time when others are being fearful, but investing in the FTSE 100 at 5,800 points is more attractive than at 7,100 and over the long term will reward you.”
Lastly, he says by drip feeding money into the market you can avoid some of the risk from the volatile nature of the current market. This means investing smaller amounts of a lump sum into the market at regular intervals and therefore creating an average entry-point price.
“It is difficult to predict where markets will go in the short term and where the bottom of any sell off is until after the event. Drip feeding allows investors to add to their portfolio should markets fall further,” he said.
Lowcock tips three portfolios in particular as good ideas to buy following the three rules he has outlined: the Blackrock Continental European, GLG Japan Core Alpha and JP Morgan Emerging Markets Income funds.
Vincent Devlin’s Blackrock Continental European and Steven Harker’s Man GLG Japan Core Alpha funds have both been beneficiaries of the strong run for Europe and Japan over the past year. Over three years they are both top quartile of their respective sectors and have also beaten their benchmarks.
Performance of funds and sectorS over 3yrs
Source: FE Analytics
Lowcock thinks Europe and Japan continues to look attractively valued compared to other developed markets, while believing policy improvements should be a particular boost to Japanese equities in the near future.
“Devlin doesn’t chase short-term market fluctuations, instead he looks for companies with long term earnings power higher than that in the market and isn’t fully reflected in the share price. The fund tends to be focused on mid and large companies and because of his strong conviction he can have periods of underperformance in the short term.”
“Harker looks for opportunities which are out of favour with the markets and performing poorly, waiting until they recover before selling. He tends to focus on large companies and his contrarian approach means he will have periods where the fund lags the market.”
JPM Emerging Markets Income, run by Richard Titherington, has in contrast suffered from the weakness of emerging markets and also underperformed its sector and benchmark over three years thanks to a difficult 2015.
“Emerging Markets are currently out of favour and remain volatile. But for long term investors willing to drip feed money in, valuations are attractive. Titherington has a flexible approach and is able to invest in defensive stocks and cyclical companies to benefit from changes in outlook for the region.”
After losing 17.8 per cent in 2015 while the MSCI Emerging Markets index fell 10.1 per cent, the fund’s strategy has been much better in 2016 with the fund holding up better than most of its peers. However it is still down in 5.6 per cent in absolute terms.
The fund has clean ongoing charges figure [OCF] of 0.93 and a current yield of 5.83 per cent. Blackrock Continental European also has an OCF of 0.93 per cent and has yield of 4.68 per cent. Man GLG Japan Core Alpha is slightly more expensive at 0.97 per cent.