Investors face the most challenging market environment for several decades, according to Mark Dampier, head of research at Hargreaves Lansdown.
Sharp price swings have been the overarching trend for most asset classes in 2016 so far. A global sell-off in equities has been the most pertinent for many investors, while gold and the safer end of fixed income have rallied. Oil has shown some signs of making a recovery but is currently teetering around the $30 level.
Performance of indices in 2016
Source: FE Analytics
Dampier, who has over 30 years' experience in financial services, says the outlook is increasingly bleak for positive returns in the shorter term, reflected in the precarious state of the fixed income market where yields from UK government bonds have continued to fall from just under 2 per cent at the start of year.
“The 10-year gilt is now at 1.4 per cent – it’s back to where it was – and we have negative interest rates, it is quite extraordinary! It is the toughest period of time I have ever known,” Dampier said.
“The last few years have not exactly been fun, though. Even though the market has eventually gone up it has been pretty hard to decipher.”
“A lot of fund managers have not had a good time with a lot of wrong asset allocation. Lots of bond managers have been ‘carried out’ because some who were able to short, shorted bonds three years ago.”
“Here we are in 2016 and most fund managers might have thought interest rates would have reached 4 per cent by now, if you'd asked three or four years ago.”
Paul Brain, investment leader of the fixed income team at Newton Investment Management, says a global slowdown, higher market volatility, and the move by the Bank of Japan to negative interest rates have pushed gilt yields lower.
“Not only have rate increases in 2016 been taken off the table, the market implied probability of an increase even in 2017 is less than 50 per cent and the first increase is now priced in for Q1 2018,” he said.
Performance of gilts over 1yrs
Source: FE Analytics
This has meant gilts funds, on average, have been the best place to have invested this year with the average fund in the IA UK Index Linked Gilts sector up 5.64 per cent and average fund in the IA UK Gilts up 4.51 per cent.
The rest of the sectors where the average fund is in positive territory are all fixed income sectors while the worst performers are the IA China/Greater China sector, IA North American Smaller Companies sector and the IA Technology and Telecoms sector.
Performance of sectors in 2016
Source: FE Analytics
Russ Koesterich, BlackRock’s global chief investment strategist, argues the recent weakness in stocks can be ascribed to several issues.
“To start, we saw further volatility in energy markets. However, investors were more focused on further evidence of economic deceleration in the United States. Last week brought poor ISM manufacturing and services surveys, although a rebound in new orders did offer one glimmer of hope.
“On the labour front, job growth remains strong but appears to have crested as employers are faced with difficulty finding qualified workers and uncertainty over financial market conditions.”
He says the major central banks’ tools are not showing much clout in stimulating growth, meaning markets are likely to remain volatile.
“Asset sales by emerging markets central banks and wider credit spreads have caused a tightening of financial market conditions despite the increasingly heroic efforts of the Bank of Japan and the European Central Bank [ECB].”
“Unfortunately, tighter financial market conditions typically coincide with equity market volatility.”
Pictet Asset Management’s chief strategist Luca Paolini is more upbeat and says equities are still broadly attractive.
“We remain overweight in equities as we believe the market sell-off has taken valuations to attractive levels; bonds remain expensive in the main, particularly developed sovereign debt, but we do see opportunities in high yield and emerging debt.”
“The market rally in developed government bonds that has unfolded over the past month has reinforced our view that the asset class was already expensive. Yields on sovereign debt are far more likely to rise than fall. Global government bonds are almost as expensive as they have ever been, well above any notion of fair value.”
FE Trustnet readers also seem up beat that the selling in 2016 is a “buy” or at least a “hold” signal. A recent poll, in which 2,500 readers voted, found that four in 10 were adding to their equity exposure and five in 10 were keeping it the same.
