Investment Strategies

EXCLUSIVE: There's Opportunity In All This Uncertainty - WealthBriefing Conference

Tom Burroughes Group Editor London 21 June 2016

EXCLUSIVE: There's Opportunity In All This Uncertainty - WealthBriefing Conference

There are a lot of reasons - the chance of Brexit, decelerating Chinese growth and the US presidential elections - for investors to hunker down. But opportunities can emerge in such times, a conference heard.

There is excessive pessimism about the broad macroeconomic outlook in the world today but this creates opportunities for investors nimble and resilient enough to look beyond current anxieties, a conference has heard.

Just as “irrational exuberance” - to use a mid-1990s expression associated with former US Federal Reserve chairman Alan Greenspan - was a trap enticing people to invest at the top of a dotcom market, so irrational gloom can be equally dangerous, the WealthBriefing Investment Strategy Summit, held in London earlier this year, was told by a panel of industry figures.

With so many market actors behaving in a herd-like way, there are opportunities for investors able and willing to go against them, the conference was told.

“Excessive pessimism can present opportunities,” Hugh Hendry, founding partner and chief investment officer, Eclectica Asset Management, told delegates. “The China economy is in a precarious situation…Japan is paralysed. I feel that many people are driving as if there is a dagger coming out from the steering wheel and they are driving along very cautiously. I’m willing to underwrite more risk,” Hendry said.

Along with Hendry, other panelists were Eoin Fahy, chief economist, investment strategist at Kleinwort Benson Investors; Bill O’Neill, head of UK investment office, UBS Wealth Management, and Marc Giesbrecht, head of European portfolio management, Lombard Odier. The discussion was chaired by your correspondent. Sponsors for the event were Bulletin; Chelverton Asset Management; Dragon Capital; Eclectica Asset Management; ProFundCom; smartKYC; Standard & Poor’s MMD; Vanguard, and Wealth Management Association.

The panel covered topics such as the likely path of global interest rates, the state of the Chinese and broader Asian economy, risks around the UK vote on the European Union, and the ways that smart wealth managers can hedge against certain events.

“We will have steady growth but very low growth. With a tactical overlay it [asset allocation] will have to be more nimble,” Giesbrecht said. He predicts more market volatility. Lombard Odier took profits on some equity gains in February after buying on earlier dips, he said, and the firm is now slightly underweight equities.

One issue is that expectations of returns have come down for many people but they arguably need to decline further, Fahy said. “It has been very difficult [to generate returns] in recent years…the best in a bad lot is equities,” he said, adding that his firm is overweight equities and negative on government bonds.

UBS’s O’Neill said that his firm is adopting a “fairly dynamic” approach to asset allocation in the current uncertain environment: “It is somewhat shorter than those of other houses because of the exceptional times in which we find ourselves.”

Asked if there is undue pessimism in the investment field, Giesbrecht said there is danger of investors being pulled around by what they read in the media, from biases towards home markets, and other sources of bias.

“There is definitely excessive bias and it is a mistake to wait for everything to be just perfect. We cannot wait for a perfect world and we are conditioned to think about the downside and not the upside,” Fahy said.

Asked about a potential UK exit from the EU – or “Brexit” – O’Neill said that taking a view of sterling is one way in which investors can play the hedging strategy to contain risks. Another way to consider the matter is to look at how Brexit has different effects on large-cap UK stocks – which have a degree of EU exposure – and more domestically-focused small-cap equities, he said.

The level of sterling will continue to be dependent on the state of the opinion polls, Lombard Odier’s Giesbrecht said. Lombard Odier started this year by hedging against sterling losses against the Swiss franc and the dollar. The bank is not hedged against the euro – the single currency will be affected if the UK leaves the EU, he said. 

The Brexit vote is already weighing on the UK economy and markets, and this effect will be even more negative if there is a leave vote, Fahy said. However, if there is a leave vote, a decline in sterling’s exchange rate will be positive for the UK’s exporters.

The discussion about hedging for the Brexit issue shows how difficult it can be to find affordable protection; options are expensive and purchasing sovereign debt is costly, Eclectica’s Hendry said. “Credit has massively outperformed equities in the last 30 years…the last 30 years have over-rewarded creditors,” he said.

Asked about China and the deceleration of its economy, UBS’s O’Neill said the credibility of Chinese policymaking has been “under the cosh”, referring to some perceived mis-steps in how authorities responded to the mainland equity market sell-off last year. “There is also a perception that China is a sort of place where foreign capital goes to die,” he said. 

Asked about emerging markets and the degree of recovery seen this year after recent declines, O’Neill said there is some scepticism about this recovery story. He is still cautious about the earnings outlook in emerging market countries. “We have not seen much evidence of the appetite for reform coming through,” he said. “There has been a bounce in the market around relatively little."

Kleinwort Benson Investors’ Fahy was more upbeat about China and the conduct of policymakers there. He praised the authorities for cracking down on abuses, or potential problems, in the country’s wealth management regime, which he said shows determination to act.

“Over the last 15 years, China has shown an astoundingly good record of managing its economy. On a contrarian view, I would be supportive of what is going on in China. I don’t think it is going badly wrong for emerging markets and we are overweight,” he added.


Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes