Last week, and for the seventh consecutive year, Investec Asset Management held its Investec Global Insights 2014 conference in London, bringing together more than 220 professionals from around the world.
Clients from Latin America, United States, Asia, Europe and the UK, from first class institutions like UBS, Citi and Morgan Stanley, amongst others, met in the English capital to work through key issues and drivers of the various investment markets, where they had the opportunity to meet the company’s leading portfolio managers.
The asset management company invited an externalspeaker for the first time, and after a few words of welcome from Investec AM’s managing director, Richard Garland, Peter Oppenheimer, Chief Global Equities Strategist at Morgan Stanley, signaled the start of the event. The conference was marked by an atmosphere of nervousness among the attendees after recent market events; with the S&P reaching all time intraday highs, the general lowering of expectations for growth, and rising deflation after the reduction of inflationary pressures.
For Oppenheimer, “these movements are not consistent with normal cycles. We are in an environment of relatively low growth, although it is true that companies have cash to spend. Their relative valuations will serve as support for equities. Growth in emerging markets will be key, but differentiation is to be expected.”
When Garland launched the audience a question as to which is the preferred region in which to invest in equities, most argued for Europe. The South African firm is also positive with European equities, while acknowledging that there is a need to be selective. “What is clear is that none of our managers are buying ‘plain vanilla’ companies, says Philip Saunders, Co-Head of Multi-Asset. Meanwhile, James Hand, Co-Head for 4Factor Equities, is confident that interesting opportunities are to be found in Scandinavia and Germany, while he leaves the UK out of his radar screen. Clyde Rossouw, Head of Quality, is committed to global European businesses that are making part of their bottom-line externally and he acknowledges that Nespresso is currently his favorite bet.
John Stopford, co-head of the Multi-Asset team, was on hand to try to provide an answer together with his colleagues, to the difficult question of whether it’s possible to find sustainable sources of income, as low interest rates policies have hindered the returns of the safest assets. The search for yield will be supported by demographic issues, policies of low interest rates and low volatility. So, how do we generate income without taking risks?
According to Stopford, credit seems to be the most vulnerable asset. Yields on corporate bonds are close to touching the lowest levels historically, and they are susceptible to an increase in both yields on government bonds and volatility. Furthermore, over exposure to high-yield market makes it unstable and prone to sufferingwhen the time comes to absorb significant volumes of sales, which would result in a lack of liquidity.
The expert assures that credit tends tosell before shares. In previous cycles, six to 18 months have elapsed before the peak in equities.
Profits are usually the driving force behind equities, moving largely to the rhythm of the economic cycle. Credit spreads are closely linked to the uncertainty in profits and volatility. Uncertainty tends to increase as we approach the end of the cycle.
“The equity market is likely to still have some way to go. Unlike bonds, stock returns are quite high by historical standards. Even so, we are at a favorable moment for equities, in an environment where profits are improving,” said Stopford. “In addition, dividends and growth thereof are likely to remain important drivers for investment in a world of relatively low growth,” he adds.
Meanwhile, Alex Moss, Real Estate consultant, says that the housing sector remains a good source of income. “The cash flow of companies within this sector is improving in general terms and its dividend yield is growing. They also have strong balance sheets and relatively low levels of debt.”
During thepanel, Victoria Harling, portfolio manager for Emerging Markets Corporate Debt, claimed that emerging bonds in local currency offer better value than in hard currency, as they are vulnerable to a widening of credit spreads in developed countries. “In addition, local currency bonds are trading at a decent premium if we analyze historical returns. Emerging currencies are cheap, but not outrageously so, so it makes sense to use them to finance exposure to the Euro or other non-USD currencies.”
In short,managers at Investec Asset Management consider that a wisely built and actively managed portfolio can reduce risk.
And,how can that be achieved? The management company recommends a diversified portfolio, choosing stocks with low beta, managing the risk of bond duration, and covering the risk tactically when it appears markedly.