Skip to the content

How to build your portfolio in the current market, according to BlackRock & SLI

01 September 2016

Investment houses Blackrock and Standard Life have warned that investors need to be prudent when buying equities in the current market.

By Jonathan Jones,

Reporter, FE Trustnet

Investors should tread carefully when buying equities, according to a number of industry experts, with concerns over upcoming political issues and the sustainability of valuations and yields among the reasons some are looking to other investment options. 

Andrew Milligan, head of global strategy at Standard Life, said: “I think it’s becoming clearer to many investors that for a whole variety of reasons – some structural, some cyclical and a lot related to the current format of monetary policy – that we are ending up in a rather peculiar world.”

“We do seem to be in a slow growth world and I think we are stuck in this situation for some time,” he said.

There are concerns globally about the state of markets, none more so than in the UK, where the EU referendum has left a shadow the economic and political outlook despite a strong rebound from the FTSE 100 in recent months.

More than $8bn has entered dividend-paying equities since the Brexit vote, according to EPFR Global, with the large cap FTSE 100, which boasts a high proportion of dividend-paying companies, outperforming the FTSE 250 mid-cap index over that period.

Performance of indices since EU referendum

 

Source: FE Analytics

However, Richard Turnill, BlackRock’s global chief investment strategist, said: “We prefer dividend growth over dividend yield.”

As a result, he said: “We advocate reducing popular positions where prices have moved beyond fundamentals (examples are gilts and bond proxies such as utility stocks).”

The flock to security in the UK has been largely due to uncertainty brought on by the EU referendum.

Milligan added: “We do get the periodic spikes in market volatility of which clearly the UK referendum vote was just the most recent example.”

However, he warns that this is more about sentiment than fundamentals and this worries him.

“We’ve been warning for some time that equity markets are being held back by the problems with corporate profits – it’s still an issue that’s worrying us.”

“If companies are paying out quite sizeable dividends – pay-out ratios are high – how much longer can this continue unless we do start to see those corporate earnings figures begin to pick up,” he said.

However, there are other impacts likely to hit investors in the coming months.


This is reflected in the Global Investor Confidence Index (ICI), which measures investor confidence by analysing the buying and selling patterns of institutional investors.

The ICI fell to 89.7, down from July’s revised reading of 98 driven by a decrease in the North American ICI from 99.8 to 89.5 and the European ICI from 92.4 to 86.8.

“Talking about volatility, there are a number of other potential events. The Italian referendum probably in November or perhaps December and certainly the US presidential election - either of those - and there are more moving into 2017 that could cause further spikes in volatility.”

Sentiment is particularly precarious in the US where the upcoming presidential election and the possibility of the Federal Reserve raising interest rates is making life particularly difficult for investors.

Despite this, the stock market has performed well, with the S&P 500 returning more than 20 per cent this year in sterling terms and 140 per cent over the last five years.

Performance of index over 5yrs

 

Source: FE Analytics

While the S&P 500 has been steadily rising over the last five years, as the above graph shows, earnings have been falling since midway through 2014.

“And why is that beginning to be a worry?” Milligan said. “Because the growth rate of US wages is beginning to pick up and the Federal Reserve is driving unemployment below 5 per cent together with relatively weak productivity growth in the US.”

“Yields are being pulled down all around the world, but it comes down to sustainability – how sustainable are these yields going to be going forward?”

“Against that background we’ve been a little more cautious on equities in recent months and quarters and looking more for the yield from corporate bonds going a little further up the capital structure.”

“We’ve been saying to ourselves there are valuations issues about some equity markets, there’s uncertainty especially related to politics but also other issues therefore we’ve very much been looking for the yields that can be provided in this low inflation low interest rate world and being quite selective on which markets we want to invest in,” he added.


To diversify away from developed market equities, Milligan says that investment grade corporate debt, high-yield corporate debt, emerging market debt are all areas that you attractive in the current environment.

Performance of indices over five years

 

Source: FE Analytics

So far in 2016, corporate bonds (as measured by the Barclays Global Aggregate Credit index) have outperformed government bonds (Barclays Sterling Gilts) by five percentage points, despite the well-documented rise in gilts this year.

Blackrock also suggests that emerging market equities are still fairly valued, in comparison to their more developed counterparts, despite an uptick of inflows and the rally across the developing world over the last few months

Performance of indices in 2016

 

Source: FE Analytics

Indeed, the MSCI Emerging Markets index has outperformed the major developed market indices so far this year. FE data shows it has returned 29.65 per cent compared to the FTSE 100’s 12.77 per cent returns and the S&P 500’s 21.06 per cent returns.

Our overweight EM equity position doesn’t appear popular despite recent flows into the asset class,” Turnill said. “Popular overweights with supportive fundamentals and valuations are still worth considering.” 

ALT_TAG

Groups

BlackRock

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.