Momentum’s James Klempster is urging investors not to fall down “a rabbit hole of negativity”, pointing out that periods of uncertainty such as the one we are currently experiencing present a good opportunity for long-term investors to buy undervalued assets.
Klempster, director of investment management at Momentum, admitted it is nearly impossible to predict political outcomes, and even more difficult to use these as a source of returns. However, he said, this shouldn’t prevent investors from being alert to where the markets have mispriced the odds of an outcome.
And he added the most important thing his team can do for investors is keep them invested.
“If they can stick with it through thick and thin, they’ll get to where they need to end up,” he argued.
“The thing we must always try to remind investors, ultimately, is that more often than not the market does go up. And it’s in your interest to stick around if you can.”
He pointed to a recent review of quarterly net returns data for the MSCI World index over the last 50 years, showing that the market was up during more than 75 per cent of the 200 quarters.
The chart below shows the performance of the index since 1975.
Source: FE Analytics
“I think that’s important to remember,” Klempster (pictured) said. “Because it’s very easy to be sidelined or taken down these rabbit holes of negativity. 
“The reality is that markets are generally cheap across the board and good fundamental analysis should be rewarded in the long run.
“There are two ways to determine if something is cheap. You can either have the price being cheap, or you can have very wild forecasts about their growth potential. At the moment, the forecast growth is relatively modest.”
Addressing worries about the US market’s valuation, Klempster admitted that it is the most expensive market out there.
“But there’s quite a bifurcation there as well,” he continued. “If you look beneath the momentum stocks’ run of the last few years, the rest of the market is not too bad.
“If you look at the more domestically oriented smaller businesses, for example, they are reasonably cheap as well.”
He added that while the US makes up half the global market, there are plenty of other regions out there that are extremely cheap, including Europe, the UK, Japan and especially emerging markets.
For example, he said, emerging markets are as cheap as they have ever been compared with the US on a cyclically adjusted price-earnings basis.
Of course, investing in emerging markets is not without risks.
“All the geopolitics you see worldwide are likely to have a particularly acute impact on emerging markets,” he pointed out.
“The strong dollar is never helpful; strong oil, which we’re seeing potentially coming back now, is also a risk factor for many emerging markets. The energy component is a large part of people’s consumption basket.”
Nevertheless, he said, these risks are more than priced in.
“So, if you’ve got enough patience and can put other things around it to get a good diversification, you can make a strong case for emerging markets today.”
Moving away from regions and towards business sectors, the investment director is currently positive on manufacturing, where again he said a lot of bad news is more than priced in. He is particularly excited about automakers.
“You’ve got Dieselgate, demand falling in China, the long-term focus away from internal combustion to electricity – all these negative factors combine to make it very easy to paint a negative picture about the sector,” he said. “But then, they’re falling into quite attractive devalued territory. Very cheap.”
However, he warns investors they will only be able to see the benefits of these low valuations if they can afford to take a long-term, buy-and-hold approach.
“If you’ve got a longer time horizon – say, 10 or 20 years, or more – you should be relatively fearless with your money. But if you need to cash out soon, you can’t afford to be patient.”
While Klempster is involved with all the Momentum funds, he is most closely aligned with the Momentum Focus Series, which he manages with Alex Harvey.
Momentum Focus 5 is a multi-manager fund that aims to deliver a return for investors over the medium to long term of CPI +5 per cent net of fees, with anticipated volatility in the range of 8 to 11 per cent. It aims to operate within the 'low/medium' risk profile as defined by Distribution Technology, the independent fund rating agency.
The minimum investment horizon should be thought of as six years.
Fund performance versus sector and benchmark
Source: FE Analytics
The £26.9m fund has returned 53.45 per cent since its November 2012 launch, compared with 65.38 per cent from its the IA Flexible Investment sector and 55.96 per cent from its UK Consumer Price +5 per cent benchmark. It has an ongoing charges figure (OCF) of 1.42 per cent.