By Mark Harris, head of investment managemment at Edinburgh Fund Managers As we wrote in April, ...
By Mark Harris, head of investment managemment at Edinburgh Fund Managers
As we wrote in April, it has been a tough start to the year, with the much-vaunted economic recovery very patchy.
This continues to be the case, with consensus earnings forecasts too high given expected levels of GDP, little sign of any improvement in capital expenditure and nascent signs of a slowing US consumer.
But attitudes seem to have moved to more extremes, with some now worrying about a double-dip recession and even the spectre of deflation.
Markets continue to suffer from the dominant influence of high levels of uncertainty, which has caused a significant shortening of investors' duration and multiple contraction.
While it is argued some markets could currently be considered fair value, investors patently need reassurance at the earnings level. We have seen extremely high levels of volatility accompanied by dramatic falls in most major equity markets.
Real assets and bonds have provided investors with their only safe havens and positive returns, although questions now arise as to the stability of these areas. This follows on from two similarly disappointing years, in which most equity investors' nerves have been sorely tested.
It will only be when these issues become clearer, sentiment improves and investor duration expands, that markets can make progress. So when will this be, I hear you ask.
Your guess is probably as good as mine, or indeed the majority of the so-called experts that have failed miserably in predicting the current course of events. All we can say is that we remain relatively cautious but see some reasons to be cheerful.
First we should remember prices rarely stay at fair value (if there is such a thing) rather than move from extreme to extreme. At the extreme lows, opportunities abound for the brave. It appears highly respected investors such as Warren Buffett are beginning to see such signs in a few distressed sectors in the US and UK.
It is extremely rare for equity markets to fall for three consecutive years, so the odds favour a positive 2003. We should also be encouraged that it will be a pre-election year and these usually provide us with very respectable returns. While history should not be relied on to guide us in the future, it does provide some comfort.
Longer term, we continue to believe it will be a struggle to find earnings growth and this has significant implications for portfolios. As a result, we retain a high weighting in Neil Woodford's Invesco Perpetual Income fund.
The good news remains that for those willing to listen, think and challenge, substantial outperformance of benchmarks will follow. Managers that remain creative and flexible are delivering relative outperformance, albeit that we would wish for positive absolute returns. Remember to speak with managers such as Bill Miller at Legg Mason, Andrew Green at GAM and Hugh Hendry at Odey as this will be time well spent.
Supportive monetary and fiscal policy.
Less demanding equity valuations.
Inflation remains benign.
Geopolitical risk still a concern.
Strength and duration of recovery in doubt.
Possible residential property bubble.
Staying invested could prove lucrative
Consider lasting powers of attorney
Less environment, more governance threatens to undermine firms' green credentials
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