Jupiter CIO John Chatfeild-Roberts says recent market volatility can offer opportunities for investors, but warns they must protect their capital as much as possible.
In the last month, European equity markets have fallen amid growing fears that the eurozone would struggle to cope with the huge debts run up by some member states and we would see a double dip recession. In the UK too, markets have pulled back, with the FTSE 100 falling 13.7% in the four weeks to 25 May.
These concerns date back to earlier this year when signs emerged that sovereign debt issues were plaguing the Greek economy which had spent far beyond its means. Two weeks ago a €110bn bailout of Greece by the European Union and the International Monetary Fund was agreed and, initially, this eased investor concerns and markets rebounded.
However, it soon proved insufficient to restore market confidence. Even after the bailout package, Greece's ratio of debt to GDP is projected to reach 150% in 2013 before starting to decline in 2014. Other countries have soldiered on for long periods with exorbitant debt levels e.g. Japan, but their dynamics have been very different. To reassure the market, EU finance ministers met again and put together a €750bn package of loans to backstop other eurozone countries if they ran into difficulty.
But investors continue to worry that other Southern European countries like Spain may need a bailout. Over the weekend, the Spanish authorities rescued one of the country's 45 "cajas" or lending banks which fuelled its 10-year housing boom. Yesterday the IMF called on the country to deal with the rest, many of whose loans have turned toxic. Today we saw a hurriedly organised merger between four "cajas" in an attempt to stop them going under. The euro fell sharply in response to the news.
In addition to these problems, markets around the world are feeling the impact of losing the fiscal and monetary stimulus packages introduced after the financial crisis to prevent deep recessions. In the UK, for example, VAT has returned to 17.5% and the Bank of England has put its money printing programme on hold.
These two factors - the withdrawal of economic stimuli and sovereign debt fears in Europe - have combined to cause a temporary loss of confidence among investors. Whether this represents a healthy correction in an overextended bull market or another leg of the long-term bear market phase we have been in since 2000 is unclear at present.
Either way, such periods of volatility can offer opportunities for long term investors. They need to, ideally with their independent financial advisers, look through short-term ups and downs and assess whether their portfolios are correctly set up for what we believe may be an extended period of uncertainty.
Part of that involves ensuring that investor capital is protected as much as possible, perhaps through holding defensive equity stocks offering a stable dividend. This can be more risky than holding cash, but stocks tend to offer higher yields to compensate for the higher risk of holding them. In a climate of low interest rates and relatively low inflation, companies that can offer a robust income yield look attractive to us. We also like the option of being able to hold gold as an insurance policy against future inflation.
Investors should also consider the value of averaging in market exposure using regular savings schemes to aim to mitigate some of the effects of volatility, rather than attempting to time the market.
While markets often go too far in one direction or another, this can create opportunities for fund managers to buy good quality shares on attractive valuations.
In this environment, we believe many of those opportunities are to be found among world class companies with strong balance sheets, overseas earnings and attractive growth prospects in emerging markets. While the West has suffered acutely from over-indebtedness and muted growth, developing countries such as China and India have relatively low household borrowing and continue to produce impressive GDP growth due to changing demographics and rising consumerism.
It is also worth noting that while sovereign debt concerns dominate news flow at present, prospects for many companies look attractive to us. For example, in the first quarter of this year, 70% of companies in the S&P 500 reported results that were ahead of expectations.
John Chatfeild-Roberts is the CIO of Jupiter and head of the Merlin multi-manager team.
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