A confluence of events has led to much uncertainty in the markets over the past few weeks. Concerns about the health of the global economy, coupled with the continuation of the peripheral European debt problem, and the more recent downgrade of US debt have led to some large and understandably disconcerting falls in the market. Our prognosis is that the market has become increasingly cynical of short-term solutions to boost economies and market sentiment, such as the quantitative easing programmes, and will now be less than content with anything but strong, credible solutions, with demonstrable central bank and political backing. Despite the headlines, we do not believe that we are experiencing a repeat of 2008, although there are obvious similarities when looking at market swings alone; however, whilst it seeks serious policy responses on the above problems, the market is likely to remain unsteady.
The ‘fear factor’ has led to some indiscriminate selling of stocks. From a technical point of view, this has meant that markets at lower levels appear over-sold in the short term. We are seeing this as an opportunity to re-weight our equity portfolios in high quality companies within our asset allocation models. It is also worth bearing in mind that equity markets are currently at levels seen last summer, and valuations are now more compelling. Over time, we will look to increase our exposure to ‘risk’ assets at the margin, but not yet.
In bond markets, high yield bonds are experiencing a substantial sell-off, although those within investment funds have held up relatively better. We expect this sector to experience a further lurch downwards as investors continue to shun risk. Conversely, high quality investment grade bonds have fared very well, although we will be watching closely as valuations may become too rich or vulnerable to any potential further downgrades from rating agencies.
To conclude, there are, unsurprisingly, several commentators who are drawing parallels between the current financial crisis and the events of 2008. There are, however, a number of important differences. What the markets are experiencing today is a crisis of confidence in politicians and their ability to stimulate adequate growth in the G7 economies, and induce stability to the European sovereign debt crisis. There is no evidence of a liquidity crisis in the banking system. Investors are likely to remain very jittery as the politicians dither - in the short term, this will require central bankers, such as the US Fed, to take the lead, as they have attempted to do so over the past few days. Longer term, however, the politicians must formulate a credible plan that will stimulate growth, and in Europe, agree on a how fiscal union can be achieved to support the Euro. Until investors believe these issues are being addressed, we expect market volatility to continue. It is important to emphasise, however, that despite the recent bout of poor economic data out of the US, and the likelihood of more lacklustre growth elsewhere, another global recession is not our central scenario, owing to the continued growth in Asia and the emerging markets, and some pick-up in US consumption as oil and food prices decline. That said, the risks to growth forecasts to Western economies have clearly risen.
In terms of our equity funds, we hope you will find the following useful:
Rathbone Global Opportunities (James Thomson): “The fund raised cash levels to 15% before the crash as the rate of profit warnings accelerated. We have zero exposure to Banks, Insurance, Mining, Chemicals, Autos or peripheral Europe, all of which have been hit particularly hard in the recent crash. Our exposure to defensive growth areas such as Tobacco and Food Producers has been helpful. The fund continues to attract client inflows. We have not yet started putting cash to work, but we expect to do so in the coming weeks, across a diverse range of sectors, as stock-specific risk is very high at the moment.”
Rathbone Income Fund (Carl Stick): “We did not predict the events of the last few weeks. We have, however, been highlighting several “storm clouds” on the horizon for some time, that the market has been conveniently disregarding, including US debt concerns, and the European sovereign debt crisis. We positioned the fund accordingly, adopting a very defensive stance, and raising cash levels. We have used our cash balance to selectively buy some more cyclical names that have fallen down to our price targets, including Intercontinental Hotels, Close Brothers, Daily Mail and General Trust. These are not yet big positions, but we think it is important to gradually re-allocate some assets into more over-sold areas of the market. Overall, our companies are reporting decent numbers, which augurs well for the long term. Balance sheets and cash balances are strong, and dividend growth has been good. We shall post a small increase in distribution for the 2011, and 2012 looks good, based upon the high dividend yields on offer. Relative to the market, we are performing well, and the three-year number is improving. Crucially, adherence to our investment process during difficult times proves that the lessons of 2008 have been learnt.”
Rathbone Blue Chip Income and Growth Fund (Julian Chillingworth): “In light of a number of potential headwinds, we started to shift the portfolio to a more defensive footing in the spring, and raised some cash by selling out of Rio Tinto and HSBC. We are now substantially underweight the banks, with our only holding being in Standard Chartered, which should continue to benefit from its emerging market exposure.
We are heavily overweight utilities, including United Utilities, and hold big positions in consumer staples such as Imperial Tobacco, Diageo and Unilever.”
Rathbone Recovery Fund (Marina Bond, Julian Chillingworth and Alan Dobbie): “Being a Recovery fund, we are of course exposed to the state of the global economy; however, the type of companies we hold are ones which have strong balance sheets; are conservatively run; are leaders in their respective sectors, and often have a structural growth angle. We are not invested in companies that are undergoing balance sheet restructurings, that are loss-making, or do not have the cashflows to back-up their profits. While we are overweight companies that benefit from global growth, we have no banks, and have a low weighting to the miners. The fund remains focused on quality – companies that may get hit in the near term, but are likely to be the beneficial survivors in the longer term.”
Julian Chillingworth
Chief Investment Officer
Rathbone Unit Trust Management