Investors should be alert to a host of risks that could further derail markets following 2016’s bearish start, according to John Chatfeild-Roberts, head of strategy for the Jupiter Independent Funds Team.
The manager of the £3.97bn Jupiter Merlin Income Portfolio, £1.56bn Jupiter Merlin Balanced Portfolio, £32m Jupiter Merlin Conservative Portfolio, £1.91bn Jupiter Merlin Growth Portfolio and £605m Jupiter Merlin Worldwide Portfolio, notes that 2016 “has been a difficult time” for global stock markets with most indices clocking up rapid losses but he expects an improvement.
According to FE Analytics, the FTSE 100 is down 5.25 per cent, the S&P 500 is down 4.1 per cent and the MSCI Europe Ex UK is down 4.36 per cent in 2016 so far.
Performance of indices in 2016
Source: FE Analytics
However, markets should be able to ride out the volatility subject to avoiding three looming risks that could cause further pain, says Chatfeild-Roberts.
“Prudent investors should always be aware of risks … there are factors that require close attention. Mishandling of the economic situation by governments or central bankers could destabilise a fragile situation,” he said.
“And the rate of economic growth in China is likely to continue slowing, so any areas that depend upon trade with China will most likely remain vulnerable.”
“In addition to this, the forthcoming referendum on EU membership in the UK and November’s US presidential election are both events that could create significant uncertainty, which makes investors nervous.”
All of Chatfeild-Roberts’ portfolios have beaten the MSCI AC World and FTSE 100 during the bear market period of the last 10 months or so but are still in negative territory. The best performer has been Jupiter Merlin Conservative.
Performance of funds and index since 27 April 2015
Source: FE Analytics
Despite the falls evident over various markets across the emerging and developed world since April 2015 – which have seen a number enter what is seen as bear market territory with falls over 20 per cent – fundamentals have not substantially shifted in the past year or so, the FE Alpha Manager adds.
“So what changed? Well, in reality very little except perception. Evidence of this can be seen by the market rise triggered by comments from Mario Draghi, president of the European Central Bank, that he may possibly reconsider current monetary policy and provide further stimulus to the eurozone economy,” Chatfeild-Roberts said.
“If such comments can trigger sudden price moves it tells you that markets are acting more on feelings than facts.”
For this reason, he says the best thing investors can do in this scenario is to remain invested and wait for the dust to settle.
“At times like this I believe it is important to have patience. The UK and US economies remain in relatively good shape and although interest rates are generally expected to rise in both countries during 2016, Mark Carney, governor of the Bank of England, has recently sought to cool the market’s expectations of an imminent interest rate rise in the UK.”
“In any case, our opinion is that interest rates on both sides of the Atlantic will remain relatively low for the foreseeable future and regardless of the exact timing any rises will be small and gradual.”
The low price of oil and other commodities, shown in the graph below, should help to give core equity markets a boost and improve sentiment more broadly, he says.
Performance of indices over 2yrs
Source: FE Analytics
“[It] is …a natural correcting mechanism for the global economy. Although price slumps are undoubtedly painful for countries that are big commodity exporters, as well as for companies involved in the related sectors, we must not forget that for many more people low commodity prices are a direct boon,” he said.
“This not only applies to countries that are commodity importers, but also to companies that can now use those lower input costs to help support their profits, while consumers all over the world stand to benefit from lower fuel and energy prices, which potentially free up more discretionary spending on other goods and services.”
Percival Stanion, head of Pictet Asset Management’s multi-asset team, agrees with both Chatfeild-Robert’s warning and his reality check.
“We would turn more bearish if growth in China and the US undershoots our expectations. However, even in this scenario – which we consider unlikely – we think the risk of a catastrophic collapse in prices is limited.”
“We consider that valuations are much lower than those that prevailed in the lead-up to the severe market declines of 1987, 2000 and 2008.”
Meanwhile Stanion says the oil price collapse is amplifying the recent sell-off but that over the medium term it is a net positive for markets.
“Over the medium term, we believe the oil price fall is a positive for the economy. Not only will it boost consumers’ spending power, it can also improve economic conditions for energy importers in emerging markets, such as India.”