Banks, Brazilians and a bumpy ride for investors

Mid-October brought a period of significant volatility to markets, which spooked investors, though there are signs of calm following the storm.

Andrew Humphries, marketing and communications director at St James’s Place Wealth Management, says: “Although the turnaround will come as a relief to investors, understandably, there are concerns that markets have entered an unnerving period of volatility.

“But long-term investors should remind themselves that sharp, short-term movements in value do not necessarily have a lasting, detrimental effect on future returns from a well-balanced portfolio.

“Volatility in markets can offer long-term investment opportunities too.”

At the end of October, the European Central Bank published the results of its asset quality review, showing a €24.7bn (£19.3bn) shortfall in banks’ balance sheets. In all, 25 banks in the EU failed the stress tests – a result that was better than some had feared, according to observers.

Paras Anand, head of European equities at Fidelity Worldwide Investment, notes: “That 25 of Europe’s 130 largest banks would require more capital in a stressed economic scenario is, truthfully, a much more robust place to be in than many would have anticipated two years ago, when concern about the fragility of the eurozone was at its peak.”

He adds: “The challenge faced by the sector going forward is the same as we see across developed markets. Until the overlap between the customers that require credit and those to whom the banks are willing to lend grows materially, it will be challenging for the financial system to play the role that it has done historically in supporting economic recovery.”

On the other side of the world, all eyes were on the outcome of Brazil’s presidential elections on October 26. Dilma Rousseff, who assumed the office of president four years ago, was re-elected in the second round with 51.6 per cent of the popular vote.

Richard Titherington, manager of the JPMorgan Global Emerging Markets Income Investment Trust, considers the investment implications.

“In terms of what investors can expect from a post-election Brazil, with 70 per cent of the population expressing a desire to see change in the country and just under half of voters choosing her opponent, the administration of Dilma Rousseff will be under significant pressure to back much-needed reforms,” he explains. “The market will focus on the reform agenda, in particular in the areas of energy and industrial policy.”

Mr Titherington cautions that neither the market nor the business community has confidence in Ms Rousseff.

He suggests: “After the dust settles, we expect market volatility will subside, and investors will once again turn their attention to company fundamentals rather than political distractions. Moreover, the recent depreciation of the [Brazilian] real has lowered the valuation risk in the currency.

“As income-orientated investors, we’ve viewed Brazil as an interesting opportunity on the basis that Brazilian companies have had a legal obligation to pay dividends equivalent to at least 25 per cent of their shareholders’ capital.”

Ellie Duncan is deputy features editor at Investment Adviser