Who cares about the macro? Not the markets, it seems.
Certainly one could be forgiven for thinking that a cocktail of tumultuous political events, even slower global growth and poor company earnings would be enough to dampen the investors’ spirits. Certainly anyone who hadn’t checked the value of their investments so far this year (if such a person exists) would probably have been expecting the worst given the gloomy headlines.
As for the decision by the UK to vote for Brexit, this can only have been bad news for economic growth, inflation, jobs and, therefore, risk assets, right?
Well, it doesn’t seem that way. In fact, with four months to go, 2016 is turning out to be a good year for investors. That is astonishing – not just because of the macro headwinds and poor corporate backdrop, but also because global equities had one of their worst starts to the year on record with a number of regions falling into bear market territory in January and February.
With sterling having devalued significantly since the referendum, the big winners so far this year have been those with a high proportion of overseas assets in their portfolio. Anything with a global tilt will have inevitably moved to the top of the performance tables and no doubt we will see more cash move into global products as a result.
The other big winners are those who have kept their faith in longer dated bonds and government bonds in particular, where we have seen double-digit returns in spite of low yields. What ever happened to the great rotation from bonds to equities?
Having spent much of the last few years predicting that UK interest rates would soon begin to normalise, the consensus now seems to be not so much ‘lower for longer’ but more ‘lower for ever’. The fact that investors suddenly seem more comfortable owning longer dated bonds at a time of record low yields is interesting, if not a little worrying.
Of course, not everyone has been a winner this year. UK commercial property has done OK, but be careful telling that to anyone stuck in an open-ended fund that has re-priced from offer to bid, applied a ‘fair’ value adjustment and then suspended trading. There’s not enough space in this article to go into commercial property in any great detail, but suffice to say the technical issues that the open-ended funds face have created some very interesting opportunities in the closed-ended space.
Elsewhere, absolute return strategies continue to grow in popularity, although on balance they have failed to deliver a positive return so far this year. Quite rightly, as these funds remove both foreign exchange and interest rate risk so will not have benefited from such tailwinds. However, I suspect the huge swings in equity prices this year will not have helped many funds in the sector either.
Finally, following several years of outperformance against the index and trackers, it has not been a good year so far for active managers in the UK. This is not surprising given the strong returns of large caps and the underperformance of mid and small caps recently. How long this continues remains to be seen but, following the post-referendum shake-out, there are now plenty of opportunities for good active managers to add value.
David Hambidge is director of multi-asset funds at Premier Asset Management
