About the Talk
November 20, 2016 12:00 PM
Tokyo, JapanTokyo, Japan
In the middle of positive signs for economic progress and with decreased focus on the bondholders’ interests, what should an investor do? We suggest these six timely tips.
Remain Actively Involved
Managers who stayed active last year experienced a highly productive time, in part due to their tendency to steer away from hyper-cyclical one-theme sectors, such as resources which had a great recovery last year, and in part due to paradigmatic policy changes during the same period.
The dominant macro-economic forces caused stock pickers to react slowly; however, with fresh themes appearing on the horizon, active managers looked at enough valuation anomalies to exploit.
Focus on Value
Valuations in the equity market stay higher than their averages over the past, in part due to low earnings in some sectors and in part due to the valuation driven drastically by low interest rates. Few windfalls can be derived from index levels; thus, be very picky when choosing within and between markets.
Never Assume or Overreact
Although political risks abounded (remember the UK exit from the EU, the rush of European elections and the entry of Trump on the scene – referred to as 'known unknowns'?) a lot of complaints, I know, 2016 taught us that anticipated reactions could totally misjudge the import of new political developments.
For instance, Brexit has certainly made predicting the UK economy more difficult; but the dip in the value of the sterling has enhanced the prospects of earnings in the corporate sector.
Predominantly, developments in 2017 could raise short-term volatility with the ultimate outcome being brought about by economic events. As the saying aptly says, the markets are short-term voting machines but long-term weighing machines.
While greater growth and increased inflation can both appear highly possible, debt levels, technology and surplus supply work together as a secular force to prevent inflation; on the other hand, any fiscal package is slow to resolve and enforce, thus, the impetus for growth may also take time to work.
Trapped in Bonds
Many of us know that Ian Fleming never wrote some of the Bond movie scripts; and so, investors have an alibi for wondering whether a bond which charges interest (rather than paying) is an asset or a liability (or, maybe seen as a temporary security).
Aim for Freedom of Thought
The present world is not more a post-factual world than a post-truthful news machine. Eventually, the truth returns with a vengeance when people who trust untruths fall along the way.
Make up your own mind; there is no other way – just make sure you get advice when needed. This is because people rush into buying during high markets and into selling going into a dip. The rule to follow in this case is: Be greedy only when others are fearful and be fearful when others are greedy.
Be an optimist. With the advent of active management and the progress of human endeavors through the centuries, it always pays to support and to look forward to progress.
Nature teaches us innumerous lessons on adaptability, a skill as widely valuable in finances as in the jungles of South America; and 2017 will surely have its share of events that will challenge our skills in reacting to difficult situations..
Check valuations closely. Equity valuations may seem high but reasonable, considering low revenues in other places, while public bond yields may seem to provide low investment value, but unthinkable under normalized conditions.
Avoid hoping for substantial returns from equities from this stage; although corporate earnings seem to be improving – it all depends really on how the growth interacts with valuation challenges as interest rates increase.
Considering that long-term UK government bonds produce less than the Bank of England's inflation goal, it might be difficult to predict how returns (before tax) will fare any better than inflation and quite easy to foresee how they will do worse.