Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a713500
Halloween special: what's haunting these 10 investment professionals
by Elsa Buchanan on Oct 31, 2013 at 12:39
While things are perhaps not quite as scary as 2012, this group of professionals still get the odd shiver down their spines.
Andrew Parry: CEO Hermes SourcecapReality knocks
‘Be fearful when others are greedy and greedy when others are fearful’, is Warren Buffet’s most famous quote.
Since the low point in September 2011, the MSCI Europe index has risen by 46% in euro terms, yet it is only the last few months that European equities have leapt from Pariah status to becoming the equity market of choice for global investors. While such rehabilitation is to be welcomed after years of attrition, one gets nervous when any asset category becomes fashionable.
Corporate profits have fallen persistently over the last two years in Europe leading to a dramatic rerating of the equity market as prices have recovered ahead of profits arresting their decline. Investors in the region are now hungry for good news, but the expected feast of tasty profit increases may turn out to be more parsimonious fare than is discounted in markets. Already, the Q3 reporting season has provided another mixed bag of outcomes with pleasant surprises tempered by a plethora of profit warnings. Recession might well have ended in Europe, but a robust recovery remains elusive still.
Along with increased stock prices and improved business confidence has come a steady appreciation in the euro against the US dollar, and a soaring of its value against the Japanese yen - +42% since the low last July. Already companies are citing currency headwinds as a reason for a lacklustre recovery in profits. The debasement of the yen and the self-inflicted erosion in confidence in the US fiscal policy making process has left the euro vulnerable to becoming the default choice for global currency investors. Spain has been painfully adjusting to austerity through an internal devaluation of unit labour costs, so they must be galled to see Japan achieve that and much more through the mere printing of money and the cheapening of their currency.
With expectations of tapering of QE by the Fed off the agenda for now, the surge in stock prices in anticipation of a continued flow of cheap money to inflate asset prices has buoyed sentiment with the lowest quality names rising at the fastest pace. At some point, however, financial reality will come knocking at the door and many of the peripheral names that are suddenly in vogue will turn out to be more trick than treat. The ugly reality behind the benign mask of indefinite QE is potentially a horror show that will haunt our lives for years to come.
Alan Steel: founder Alan Steel Asset ManagementWin win funds
What scares me most are funds where folks think they can’t lose because they’re safe - like bond funds where marketing nonce has encouraged far too many advisers to pile their clients into them, especially the belief that GARS type funds are the Bs and Es . Between them these ‘sectors’ have seen inflows of billions over a five year period when the world was supposed to end somehow but didn’t and risk on was the style to support .
It reminds me of the days when with profits was the easy sell; and look where they ended up. It shocks me to think that to this day, no matter which regulator is appointed, this sort of easy sale is acceptable. And we still have to say: ‘Past performance is no guide to the future, etc… ‘despite clear evidence that sometimes it is and easy to spot - like, whenever the herd want to buy something, it’s obviously time for a sharp exit. So maybe the risk warning should read – ‘If you’re absolutely convinced this investment is right for you because everybody else is piling in, do think again’
Andrew Gilbert: investment analyst, Parmenion Investment ManagementA lack of ethics
We’ve just seen the end of the National Ethical Week 2013 and as I kissed my newborn son this morning, my thoughts naturally focus on the future. The UK is massively behind the US and Europe in terms of ethical investments. In the US, ethical investment is estimated at 13% ($3 trillion) whilst the UK lags behind at 1%. Many are unaware of ethical investment choices which would explain the low figures in a society where 38% of investors want to invest ethically.
Investing ethically does not mean sacrificing performance, and personally I think a world where environmental issues and human rights abuse are simply ignored is pretty scary.
Dr Brian Hilliard: chief UK Economist, Societe Generale Corporate & Investment BankInterest rate rises
I am scared that markets risk getting carried away and bringing forward rate expectations too far.
The latest data on UK GDP show the economy putting in a strong performance in the third quarter with acceleration from 0.7% in Q2 to 0.8% in Q3. Finally the UK recovery seems to be taking hold and growth of roughly 1 ½% should be achieved this year.
The economy seems to be in a sweet spot at the moment. The manufacturing sector is picking up, albeit, very unevenly, the construction sector is being buoyed up by the housing market and the services sector, by far the largest sector of the economy, is growing strongly. This is a recipe for continuing growth.
Of course one cannot be complacent just because the economy is finally showing signs of life after such a protracted period of great weakness. The level of GDP fell by 7.1% peak to trough in what proved to be the deepest recession since the 1930s. Even after the latest figures, output still stands 2.5% below the pre-crisis peak.Against this background, it is not surprising that the Bank of England wishes to ensure that the recovery is not derailed by a premature tightening of policy. I am not a great fan of its new Forward Guidance approach but it is well-intentioned. The objective of the Bank is to give a strong signal to the markets that it intends to keep policy unchanged for an extended period of time to ensure that the recovery beds in.
Already in recent months, the hints that the US Fed could be on the point of starting to taper its asset purchases have led to significant upward moves in the US yield curve and which have been felt in the UK yield curve as well. Some of those moves have been reversed in recent weeks as the Fed confused markets by drawing back from what appeared to be a solid commitment to start tapering when the US unemployment rate hit 7% and also by worries in the markets that the US debt impasse could damage growth.
We expect by the end of the first quarter next year that the uncertainty over Fed policy will have lifted and the US debt shenanigans will be over. This will lead to renewed upward pressure on US money market and bond yields which will in turn put renewed upward pressure on UK rate expectations.
Robert Smoker: executive director at Brown ShipleyTaper timing
What really scares me is the thought of what the nightmarish impact on the encouraging signs of improving economic activity in the US and Europe would be if the respective central banks get the timing and extent of tapering the current quantitative easing wrong.
James Corcoran: senior adviser, CourtiersFear of the unknown
When you are sitting down to watch a scary movie this Halloween look out for the lack of logic the characters demonstrate. Conducting séances in graveyards, going off to investigate strange noises coming from the basement – characters in these films often do something very stupid, and as a consequence of their actions end up at the wrong end of a sharp pointy thing.
Similarly investors, maybe feeling especially brave on the back of the good run of returns that we’ve seen recently, could be tempted to throw logic out of the window and go for investments they don’t understand on the promise of good returns.
While the consequences may not be as dramatic, they could still end up with a very scary result. Investors should remember to stick to the fundamental principles of why they invested in the first place, and not be swayed by the promise of good returns. It’s vitally important to not invest in anything unless you have a thorough understanding of it, and recognise and accept the potential pitfalls.
James Sullivan: fund manager at MitonLoose monetary policy
What worries me most is the dependence on ‘looser for longer’ monetary policy from central banks, and the over reliance on the authorities executing it flawlessly. The consequence of a policy error is potentially disastrous for most asset markets, and the direct impact on businesses and households in developed economies could be significant.
An inflationary scare brought about by copious amounts of QE could lead to premature normalisation of interest rates at a time in the economic cycle when debt servicing cost is the only saving grace for many small and mid-size companies and households.
James McDaid: discretionary fund manager at GAMHelp to buy
It was not even ten years ago that investors were scrambling over each other, zombie like, in a quest to get their own piece of the UK housing market. Banks weren’t particularly choosy on who they would lend to. It all came to an abrupt end with the credit crisis in 2007. First time buyers were more or less cut from the ladder as banks tightened up their lending criteria. Negative equity became a nightmare reality for many around the UK.
And then along came the government with the ‘Help-to-Buy Scheme’. Lending is now at a five year high and UK house prices are on the rise again, worryingly so after October’s 10% a month figure for parts of London. It is early days yet, but the risk that the UK’s obsession with home-ownership is inflamed once again, leading to another bust somewhere down the line, should not be under-estimated. Can the government be trusted to manage this properly?
Across the Atlantic, the tapering dilemma is dragging on. Tapering too soon could bring an abrupt end to the US recovery, whereas delaying the decision could lead to a bigger fall for the propped up assets. Bernanke’s successor will not be sleeping easy at night!
Simon Brett: CIO Parmenion Investment ManagementUS debt ceiling
My worst nightmare is that the US debt ceiling impasse causes another US government shut down and prolonged talks cause US Treasury yields to rise. US Bonds are seen as the ultimate safe haven, being used as collateral in many markets and their implied interest rate is used as a benchmark for valuing assets globally.
Loss of confidence in the US and its treasury markets may cause dislocation in the functioning of the world economy, just as there are some tentative signs the world is recovering from the previous nightmare of 2008. The ‘trick’ will be for US politicians to set aside partisan differences for the common good, the “treat” will be steady stock markets.
Tom Becket: CIO Psigma Investment ManagementPolitical risks
Judging by current market behaviour and the swinging sentiment indicator around London, it is clear to tell that many market participants are willing to brush aside all doubts and focus on the potential upside in equity markets. Over-optimism is certainly something to watch in the coming quarters.
Politics remains the greatest extant risk to markets and there seems little doubt that corporate and consumer confidence will have been sapped by the chaos on Capitol Hill, but we hope this will in time lead to more pent-up demand. However, this is far from certain and the political risks in the US have been delayed not dealt with decisively. To suggest that the European political carnage has finally ended would also be premature and we should expect flare-ups, although hopefully less frequently than we have become used to in the volatile last few years.
We have less fears over the near term path for the global economy, as economic momentum seems to us to be sound in the short term; it can be easily summed up as the US is fine, Europe is recovering, Japan doing better and the Emerging Markets stabilising after their summer swoon. However, one has to wonder with some trepidation whether this is a cyclical improvement, rather than structural growth that will carry us nicely through 2014.
The biggest risk remains bond markets and we need to watch inflation expectations in 2014 and any impact that they might have on the sovereign debt markets. In the immediate future, all markets seem to have been able to re-adjust to the new level of US Treasury yields and, as yet, the worst fears over rising yields have not been realised. The hands are still trembling though and Dr Yellen and the new Fed (there’ll be six new voters next year) also need close scrutiny.
In equity markets we certainly worry about earnings growth in the final quarter of 2013 and next year, even as most analysts have pencilled in a robust growth trajectory. While we admire equities as our “asset class of choice for the next five years” we recognise that equity markets have had an incredibly strong run in 2012 and 2013 and that this has mostly been driven by multiple expansion and elevated margins, rather than by increasing revenues/ top line growth. This has to change if the optimism that many have over equity markets is to be justified.