Fund selectors and advisers currently face a difficult choice. Various economic and business information flows have the potential to point to widely differing potential outcomes for investors. Asset allocation may never have been more challenging.
On one hand many companies are, as widely predicted by some managers earlier in the year, reporting earnings on the upside. But, on the other side, the weight of macroeconomic concerns continue to stifle optimism.
A recent note from Gartmore summarised the problem pointing to a clash between fundamentals and macro fears. In the case of the US it said: “Movements in equity markets are being driven by global economic events rather than individual sector, industry and company fundamentals. These fears appear at odds with reality.”
Meanwhile, a recent survey of 136 advisers by Baring Asset Management indicated a strong interest in emerging markets. A solid 66% indicated this was where they saw the greatest opportunity lying.
Indeed, so many investors are now pinning their hopes of future growth on emerging markets, and especially China, that even the slightest sign of weakness in this sector could send some into panic.
At this point, it is worth remembering the historical volatility of emerging markets, and, while this volatility is often temporary, the ability of investors to stand the pain will ultimately determine long-term returns.
The overall macroeconomic uncertainty is neatly illustrated by a perusal through this week’s Big Question on page 32. This shows there is clear disagreement between economists as to whether the UK is in fact on the path to a sustained recovery or will be derailed by international or domestic factors. Interestingly, while some are blunt in their negative outlook, even the more optimistic commentators couch their outlooks with concerns.
Perhaps the best prism through which to view the various market signals is one of opportunity. Managers with strong convictions and good stockpicking skills should be able use the uncertainty to add real value to client portfolios.
As John Hanley of Marsico Capital Management (sub-advisers to the Gartmore US Growth and US Opportunities funds) said this week: “As fears begin to dissipate and once individual company fundamentals begin to matter more to investors, good-quality stocks will deliver strong returns and outperform the market. In the long run, fundamentals will prevail as fears finally subside.”
