Investment Strategies

Don't Panic! Rothschild's Investment Chief Says Market Worries Must Be Balanced By Underlying Good News

Tom Burroughes Group Editor London 15 July 2015

Don't Panic! Rothschild's Investment Chief Says Market Worries Must Be Balanced By Underlying Good News

A very human tendency to emphasise negative news and ignore positive developments can lead investors astray as much as exaggerated optimism can do, Rothschild's investment strategy chief says.

While there are market gyrations in China, Greek debt wrangles and other events to shake investors’ nerves, pessimism needs to be balanced by understanding that in general, global living standards have never been so good, according to the man setting strategy for one of the world’s most renowned private banks.

Kevin Gardiner, chief investment strategist of Rothschild Wealth Management – and who is shortly to publish a book about his own views – told journalists that some recent worries around China, Greece, the US economy and potential UK exit from the European Union are overstated and can cloud investors' judgement if not put into a larger context.

In recent weeks, markets have faced the prospect of Greece leaving the eurozone – possibly averted for the time being – a slump by around a third in Chinese mainland shares and some soft US economic numbers.

“We can overstate some of the things that concern us,” Gardiner, speaking at the firm’s offices in the City of London, said. 

Gardiner’s new book, Making Sense of Markets, focuses on how people often exaggerate the negative news as far as long-term investment views are concerned and also argues that underlying living standards have improved markedly since for much of the past half-century. His book highlights how people are unjustifiably concerned about issues such as debt and ageing populations.

Turning to the more immediate concerns around Greece and last weekend’s debt deal between the country and other eurozone members, Gardiner said Rothschild’s investment views were not based on any particular outcome because the participants themselves were unclear what will happen.

“Whatever happens, even if there were to be a `Grexit’, the system generally is strong enough… terms of the big picture we will continue to muddle through.” “The balance of risks is some sort of `muddle-through’ scenario,” he continued. Eurozone countries have concluded that Greece has more to lose than gain by exiting the single currency bloc, he said.

One outcome worth noting, he said, is that actual lack of market volatility in recent weeks around the Greek debt wrangle.

China, US
China’s A-Shares equity market in the mainland has slumped since hitting a peak on 12 June, prompting authorities in Beijing to ban short-selling and impose other restrictions to curb further falls. These actions have, according to some wealth management houses, undermined confidence that China is close to being ready for full inclusion in major institutional portfolios. China is also pushing to make its renminbi currency a rival to the dollar – the market turmoil may have delayed such ambitions.

“The long-term story [on China] is still intact,” Gardiner said, while he argued that investors wishing for exposure to China’s equity markets should do so via the offshore route, such as through holding Hong Kong-listed firms, or through funds. 

He also argued that while China’s gross domestic product is likely to decelerate from the red-hot levels of recent years, paradoxically it may coincide with stronger corporate earnings, and hence rising equities, because there will need to be a tighter focus by firms on improving returns and controlling costs. A problem in recent times, Gardiner said, has been political direction of investment – leading sometimes to waste of capital. 

“The government has been getting in the way and driving a big wedge between bottom-line revenue and growth of top-line income,” he continued. 

Asked about a period of soft US data, Gardiner said the most recent figures suggested growth is continuing relatively steadily; there is still a large surplus of private sector cash that can be put to work. “For the time being, we are giving the US economy the benefit of the doubt,” he said. 

More broadly, when looking at cyclically-adjusted equity market valuations drawn from Morgan Stanley Capital Interanationa’s benchmarks, values are in line with a 10-year moving average. When interest rates are also taken into account, equity markets are inexpensive, Gardiner said.

Among some predictions, Gardiner said he expects the US Federal Reserve to hike interest rates by possibly one or two moves by the end of this year, but in small individual sizes.

In terms of the firm’s broad asset allocation, Gardiner said that in his view, the best opportunity for clients to earn returns is through the equity market and with some exceptions, Rothschild was not advocating that clients should hold bonds for “return assets”.

When asked about whether a possible UK withdrawal from the European Union would damage the UK economy, Gardiner said that at most, an exist could shave a small percentage off GDP; he argued that unlike an earlier UK referendum on EU membership in 1975, when global tariff walls were relatively high, the picture was very different today, so that the UK would not face a major problem outside the EU. “I don’t see it as a life-threating event for the economy,” he said.

Gardiner also suggested that emerging market investors were best advised to get exposure to the Asia-Pacific region because of better macro-economic policy and a wider range of sectors in which to invest. Russia, by contrast, was far too risky and reliant on one or two sectors (oil and gas) for the bulk of earnings.

Rothschild Wealth Management, which can trace its origins to the early 19th Century,  has around£7 billion of assets under management.


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