Stick to safe havens
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When investors returned from the Christmas break they believed that all was right with the world and were inclined to push markets higher.
We cautioned that the global macroeconomic outlook was less rosy than it appeared, though, and positioned our portfolios accordingly.
Today, having experienced rollercoaster market conditions and something of a hollow victory, we would observe that little has changed to alter our cautious stance.
Uncertainty abounds. The previously optimistic mood, fuelled by better news coming out of the US and flickers of light at the end of the European tunnel, has been replaced by realism surrounding global growth concerns, further signs of slowdown in China, the impending fiscal cliff in the US and a European situation that is anything but clear.
Any light that markets perceived has been replaced by darkness. At the same time, equity valuations and bond yields are viewed with caution as central banks manipulate them following the financial crisis.
Meanwhile, the squabble between investors and politicians continues, with the motivations of the latter not easy to assess and subject to change as the pendulum swings between cries for austerity and expansion. The political backdrop is a key driver of markets at present, but attempts to anticipate the actions of politicians are likely to prove vexing, time-consuming and ultimately fruitless. We have already seen the effects that huge levels of liquidity provided by governments can have. In such a scenario, it is therefore necessary to focus on factors that are more easily understood and offer a navigable route through inevitably choppy markets.
This is easier said than done, but having a wide range of tools available for use and maintaining broad diversification across asset classes raises the probability of success.
Where equities are held, exposures of a defensive nature should be sought. This can be achieved through managers with a preference for high quality growth companies, as opposed to deep value situations, or those with a focus on dividends as a source of total return.
It may also be sensible to avoid regions near the eye of the storm. Additionally, strategies seeking to deliver absolute returns, which can benefit directly from market volatility or the ability to take short positions, provide attractive returns in falling markets.
It should also be observed that cash is king in today’s circumstances and keeping one’s powder dry may ultimately prove very rewarding (albeit earning minimal returns in the meantime) as the outlook begins to clarify itself.
Cash appears to be a more appropriate safe haven than government bonds when upside and downside scenarios are weighed up, in spite of the latter continuing to deliver in a ‘risk-off’ environment.