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Whitechurch Securities: Why “the only way is up” for markets

15 March 2017

The wealth manager explains why investors need to look through the short-term political noise to lock in some potentially attractive gains this year, despite some markets trading on all-time highs.

By Lauren Mason,

Senior reporter, FE Trustnet

There are still plenty of opportunities to lock in gains this year despite many indices trading on all-time highs, according to the investment team at Whitechurch Securities.

The wealth management firm says that, despite stock markets remaining on an upward trajectory this year, geopolitical uncertainty has still weighed on investor sentiment.

This can be seen through the outperformance of defensive equities and the continuing strength of government bonds last month, despite expectations that inflation will continue to rise this year.

“The change in leadership to more defensive sectors was particularly pronounced in the UK stock market and this was exploited by defensive stalwarts such as Woodford, Evenlode, Trojan and Rathbones,” the team stated in its latest investment note.

“Overseas equity markets enjoyed a strong rally over February, but it was also quality and defensive sectors leading the way as bond yields across the world fell substantially.

“The best-performing sectors were the defensive areas of healthcare, staples, utilities and IT, which suggests that markets continue to climb a wall of worry rather than being driven by bullish euphoria.”

Performance of indices in 2017

 

Source: FE Analytics

The investment team at Whitechurch isn’t alone in believing there are still opportunities across equity markets.

In an article published yesterday, Henderson’s head of multi-asset Paul O’Connor argued that the reflation trade still has much further to run across certain areas of the market, despite the start of a growth/value rotation among equities last year. 

“Even though some areas of the equity market are quite hot, investors are buying more bonds. If you look at the credit market it seems euphoric, spreads keep getting lower every day, yields keep going lower every day, these assets have been completely untouched by inflation,” he reasoned.

“I would say the big picture is that investors have embraced the reflation trade, and it shows that they have priced in a cyclical upswing in macro momentum, but what they haven’t priced in is a big change in the structural picture.”

Despite generally remaining positive when it comes to finding opportunities in equity markets, the team at Whitechurch is cautious on US equities, given the Dow Jones index has achieved 12 consecutive daily gains for the first time in 30 years.

This, combined with the volatility index residing at very low levels, suggests to the team that investors are becoming too complacent in terms of how much growth Trump’s proposed fiscal policies will lead to. 

“Whilst burgeoning optimism and high valuations does make us cautious on US equities overall, we do believe that smaller companies can be beneficiaries of the focus on domestic growth. But our favour for developed market equities is focused towards Japan and Europe,” it said.


“Following the sell-off that followed [Donald] Trump’s election, Asian and emerging markets have returned to favour so far this year and in February, these markets continued to produce positive returns based on expectations of stronger global growth.”

Performance of indices in 2017

 

Source: FE Analytics

While emerging market equities were the ‘investment darlings’ for most of last year as developed markets remained rife with geopolitical uncertainty, they have started to lag developed market equities over recent weeks as investor sentiment has become more resilient to the changing political landscape.

That said, the market area has still performed well in 2017, with MSCI Russia being the only individual index to fall in value over the course of last month.

In fact, the performance of emerging market equities as a whole has been bolstered by China and India, which both rallied strongly in February. 

“India was the best performer of these regional markets in February,” the Whitechurch team continued. “Q4 GDP growth came in at 7 per cent, making it the fastest growing of the major global economies. This was welcomed by investors concerned over a short-term drag from Modi withdrawing banknotes last November.

“At the same time inflation has fallen to 3.2 per cent (the lowest since CPI was introduced in 2012).

“Chinese markets also continued to perform strongly over the month and their return to favour has been a key feature year to date too, as investors see scope for the country’s economic recovery to strengthen.”

Over the short term, Whitechurch notes that the strengthening US dollar, as well as the potential implementation of protectionist trade policies from Trump, could prove to be headwinds for the asset class.

For those who are patient and are willing to look through short-term noise though, the firm says emerging market fundamentals are improving, with commodity prices and Chinese growth becoming more stable over the last year. 

“Our overweight position of these markets versus underweight US can be a headwind (and a key risk in 2017 as it was in 2016),” the team at Whitechurch said.

“If Trump delivers on strong fiscal stimulus, and revives the domestic US economy, this could lead to underperformance, but this would be offset somewhat by stronger, long-term global growth that would be positive for Asia and emerging markets.”

Closer to home, it says economic data for the UK was mixed in February, with income stocks and defensive sectors outperforming oil & gas, miners and bank stocks.


While GDP growth was revised upwards to 0.7 per cent for Q4 last year, PMI data proved to be lacklustre compared to the expectations of many industry professionals.

Investors also had to grapple with a continuing slump in sterling, combined with an increase in inflation as a result of the falling exchange rate.

Performance of currency vs US dollar in 2017

 

Source: FE Analytics

“Looking ahead, although we expect to see inflation ticking further upwards (Bank of England expects inflation to hit 2 per cent this month), a low growth environment and ongoing uncertainty regarding the shape of Brexit will mean UK interest rates are likely to remain at emergency levels,” the Whitechurch team explained.

“With equities providing considerably higher yields than cash and bonds we believe dividend stocks remain enticing and should provide the core to stock market exposure.

“However, we also believe that stock-picking in medium and smaller companies that have been out of favour will prove rewarding, with a favour for a contrarian value focused approach.”

Generally speaking, the team says political uncertainty has dominated headlines over the last few months and will continue to do so. While this may deter some of the more cautious or short-term investors, it believes these events are a sideshow and are therefore not influential in its investment strategy.

“We have seen that hiding in cash as protection from last year’s shock events would have seen you miss out on double-digit returns across most global equity and bond markets,” Whitechurch highlighted.

Performance of indices in 2016

 

Source: FE Analytics

“Indeed, even with some equity indices reaching all-time highs, we believe that the year ahead can provide many opportunities for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.”

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