12th November 2015
On Tuesday 10th November, our sister company, Chelsea Financial Services, hosted an event for financial journalists, where Richard Buxton, CEO and fund manager of Elite Rated Old Mutual UK Alpha, and Mark Holman, CEO and one of the managers of the Elite Rated TwentyFour Dynamic Bond fund, gave their thoughts on the outlook for equities and bonds. Here's what they had to say:
“There are no bones about it, fixed income could be the 'dog' asset class next year – not all of it, but definitely some of it. December could be the most important month of the year for fixed income.
“The future is at least now certain: We will have both more and less stimulus from central banks – Mario Draghi has said he'll give more when the European Central Bank (ECB) meets on 3rd December and I'm in no doubt that Janet Yellen and the US Federal Reserve will raise interest rates on 16th December. The non-farm payroll figures last month were unambiguously positive so, unless the next set of numbers on 4th December are suddenly going in the opposite direction, there is absolutely no reason why rates shouldn't, at long last, go up.
“So if you had a blank sheet of paper, how would you invest in this asset class in 2016? Fixed income is still a fundamental building block of portfolios and income generation, so it would be wrong to ignore it completely.
“I'm not too nervous as, as I've said, the future is now known, but a fixed income portfolio next year will look a lot different to the past few years.
“Interest-rate risk is high – when interest rates go up, the yield on bonds follows and the price goes down. So in the short term we need to be tactical and limit the amount of damage interest rates can do to the portfolio. For example, if a fund has, on average, bonds with 3.5 years to maturity and interest rates rise by 1%, you could lose 3.5% of capital.
“I don't think rates in the UK will be above 0.75%, or maybe 1%, at the end of 2016 though, and I don't think we will get above 3% at the end of this 'cycle'. So while increases will hurt fixed interest assets, they won't destroy them as they did in 1994. But the move will cost you money if you just own gilts.
“We can add value by focusing on credit risk and at the moment companies are doing ok, so there are opportunities to be found. If we can find a high enough yield, this will then also compensate for any losses made due to rate rises. In the example above, if you lose 3.5% but have a yield of 5.5%, you are still 2% up.
“Europe is still quite cheap and the credit risk (possibility that a company will default on its debt) is pretty low. More monetary easing will help keep the economic recovery on track and make companies more competitive as the euro will fall in value. So this is a particular area where we think we can make money.”
“We are still living in unchartered territory. Seven years on from the start of the financial crisis and interest rates are still at emergency levels. I think this economic cycle will be more than double the length of a 'normal' cycle and could last as long as 15-20 years. It seems that for most investors, the glass is still half empty and at risk of breaking! Everyone is very cautious and not prepared to trust. We take one step forward, then two steps back.
“The big event of 2015 was the market's realisation of what has been going on in China for the past few years! The government there has a big job and, believe it or not, has been studying what happened in the UK in the 1970s – when we went from state-owned companies to consumption and financial services leading our economy. It took us 40 years, though, and they are trying to do it in 15. It's a big ask.
“I view this summer as a healthy setback. As long as the data stabilises in China, that 'event' is now over. I don't expect any further deterioration in global growth. Next year will see the 'oil dividend' (lower prices) boost consumption in other economies, which will be good for growth and profits. Policy makers will continue to be supportive, but nudge interest rates up very slowly. We could still be discussing the pace of interest rate rises in 2-3 years' time. I also think that US interest rates will rise in December and that UK rates will rise six months later.
“Equities have had a frustrating year. The UK stock market hit 7,000 then fell away again, but I still stand by my statement earlier in the year that we are at the start of a 15-year bull market. The pace of reduction in employment has slowed, but only because it was so fast. The outlook for the UK economy is good. The momentum of growth has peaked but we are still growing at half a percent a quarter, on average. There are also good levels of profit growth from domestically orientated companies. I've recently added to my mega-cap holdings, where I think there is most value.”
“Outside the UK, Asian equity valuations are very good and the European recovery is being underwritten by the ECB. A lot of money has already gone into Europe, though, so Asia is really the area of interest for us in 2016.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mark's and Richard's views are their own and do not constitute financial advice
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