Exit pursued by a Bear: Six key investment themes for 201611 January 2016
Exit pursued by a Bear: Six key investment themes for 2016
Tilney Bestinvest’s Chief Investment Officer Gareth Lewis highlights the six themes likely to dominate investment strategy over the next twelve months
2015 was noted to have been a tough year for the markets, dogged by concerns around the slowdown in China, and the prospect of the US embarking on an interest rate hiking cycle, however 2016 has already got off to a rocky start with the Shanghai Composite Index tumbling 6.9% in its opening session. The rout spread out to developed markets with a sea of red across the leading European exchanges, with the FTSE 100 Index off 2.39%, which was the worst start to the FTSE 100 since 2000 when the tech-bubble burst. What then has the rest of the year have in store?
Gareth Lewis, Chief Investment Officer at Tilney Bestinvest, which oversees £9 billion of assets, sets out six themes that he believes will influence investment markets during 2016 and that are driving Tilney Bestinvest’s investment strategy.
1. Liquidity : the cause of and solution to all of life's problems - Excess liquidity provision has driven an indiscriminate bull market across all asset classes
“Banking deregulation and Fed monetary policy have driven a 15 year liquidity glut. The resulting capital misallocation (TMT ,US housing, China) has created increasingly frequent bouts of capital market instability. The 08/09 banking crisis drove the global economy close to a synchronized depression.
“The “fix” has seen central banks (In the West) and Governments, namely China perpetuate the problem by driving down the cost and increasing the supply of liquidity. While this policy initially averted a worse crisis it has allowed the excesses to build further. This has encouraged further mal-investment as investors have taken on more risk in search of yield.”
2. China: extreme capital misallocation- Capital misallocation and a devalued currency are the global economy’s biggest threats
"Chinese debt accumulation since the global financial crisis has been the fastest in history as the authorities response to slowing end markets for its manufactured goods has been an explosion of debt funded internal investment. Both the magnitude and speed of this investment assures misallocation.
“We believe a hard landing is now inevitable – it’s just a matter of when. However we expect further stimulus measures to put off the day of reckoning – interest rate cuts, cuts in the RRR, extending the local Government debt refinancing, state intervention in both property and stock markets.”
3. One and done! - Will the Fed be forced to reverse its recent rate hike?
“US monetary policy appears to have had a myopic focus on asset prices. QE had outlived its useful life by the time of QE3, which resulted in recent asset price distortions. The decision to first taper policy then raise rates was cloaked in economic language, but smacks more of trying to undo previous policy mistakes. If global economy deteriorates as expected the Fed could become the fifth central bank to reverse monetary policy since the global financial crisis.”
4. The case for secular stagnation - Global growth remains weak – the causes appear structural
"Many of the current conditions of the world economy show signs of secular stagnation, as easy credit, capital misallocation and excessive debt has led to weak growth and ‘lowflation’. The absence of true credit cycle has prevented the needed destruction of excess capacity.
“Only the inappropriate and excessive debt fueled Chinese investment cycle has kept world growth afloat. Weak commodity prices and the collapse in the price of oil are symptoms of this phenomenon. The consequence will be lower terminal interest rates (the “new normal”), weak inflation and lower for longer bond yields.”
5. Bond markets – the canary in the coal mine? - Stresses in US High Yield point to problems ahead
“Bond markets have replaced banks as the major source of funding post global financial crisis. Stress in this area is a probable pre cursor to a wider solvency issue. US High Yield default rates recovered too quickly post crisis as income seeking capital flows drove down the cost of capital.
“Resulting mal-investment has been exposed as oil and commodity prices collapse and deteriorating free cash flow is beginning to threaten debt servicing ability.”
6. Politics not economics will drive the next round of policy - Social inequality will drive a shift in policy from monetary to fiscal
“It is naive to assume the current policy orthodoxy will go unchallenged as current monetary policy has failed to secure an equitable and sustainable recovery. In fact it has accelerated the pattern of wealth inequality favoring the asset rich over the wider populace. The US is the most extreme, but the pattern is repeated throughout the developed world. This is causing a growing frustration with current policy that threatens the credibility of the world’s leading central banks.
“A whole generation will soon be priced out of the UK housing market. The solution is more housing and lower prices not more debt and subsidies.”
“In conclusion, we think that 2016 is likely to be a volatile year for the markets and have positioned our portfolios very cautiously. We are underweight equities and bonds and zero weighted to industrial commodities. We are overweight absolute return funds and cash, and have a small exposure to gold as an insurance policy in the event of collapsing confidence in central banks policies.
“China remains at the centre of our concerns and this translates into a continued bearishness towards commodities and the risk of ongoing disinflationary pressures. We think a material devaluation in the Yuan presents a real risk of sparking a further round of currency wars and that further QE from Europe and Japan is likely.”
- ENDS –
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.
For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.