PSigma retains positive outlook, but remains wary of risks, says CIO Becket
Thomas Becket, chief investment officer at Psigma, says that the manager’s preference for equities does not indicate a shift away from a cautious stance.
We presented our “cautiously optimistic” view on financial markets and the global economy for 2013 in our communications late last year and in January’s newsletter. We subsequently received feedback questioning whether we had changed our approach to investing. In particular, some asked about the latest alterations to our asset allocations and whether our current preference for equities hinted at a departure from our traditionally cautious investment style. The short answer is that nothing has changed to our core investment beliefs; we remain ever-respectful of the downside risks that exist. However, our investment process allows us to be opportunistic and to hopefully maximise opportunities as and when they are presented across global financial markets. We currently believe that the global economy has started a cyclical improvement and confidence is generally improving, meaning that we should have a higher tolerance for equities. However, in this month’s View we will gaze in to our crystal ball and examine the various risks that presently focus our minds.
A crisis of confidence
The Great Financial Crisis of 2008 was a chastening experience for everyone, but particularly for investors. Large falls in asset prices and unprecedented volatility created a huge vacuum in confidence, which has put off many investors from wanting to have anything except a low tolerance for risk. Many investors are still inclined to see every swan as black, whilst we know that most are white. Business, consumer and investor confidence all remain in short supply today and “we are like crystal, we break easy”, as the magnificent New Order once sang. As soon as any risk appears on the horizon the primary instinct is to run first and evaluate the consequences later. This has meant persistently high levels of volatility in markets, which in turn has led to structurally lower appetite for embracing risk, even if there are cyclical bouts of enthusiasm (such as in the last two months). Despite signs of amelioration in confidence levels we recognise that it will remain brittle and therefore volatility will be with us for some time to come.
Politically driven markets
Over the last few years the greatest driver of fluctuations in confidence and markets has been the pesky politicians. Every major inflection point in markets has been driven by comments or actions from politicians or central bankers. Recent events in the US over the “fiscal cliff” debacle graphically illustrated the powerful hold that politicians have over markets and this makes us nervous. As does the increasing influence, be it overt or covert, that governments have over the central bankers. Where are the next political flash points that concern us? Certainly in Europe the imminent Italian election and the autumn German election are worthy of note, whilst the US politicians seem almost certain to create further chaos as discussions over the raising of the “debt ceiling” rage in May. All of these events have the potential to create waves in markets and impact confidence. We are also worried about the latest salvo in the global “currency war”, which has been fired by the Japanese. Although it has been beneficial to our investment strategy, the collapse in the Japanese yen has triggered a new wave of currency volatility, which can create distortions in the economy and make politicians jittery and reactionary.
As we described in January’s View from Psigma, we expect the global economy to persist with its “boring, bumpy, below-par and brittle” output in the early months of 2013, before improving in to the second half of the year and maintaining good momentum in to 2014. Our view remains that the recent economic
improvement in China, decent growth from the US, stabilisation in Europe and pent-up demand from businesses will lead to an encouraging trajectory in global growth. The early data points in 2013 have strengthened our conviction in this view, with even Europe showing some tentative signs of hope. However, as we have learnt in the last few years, economic cycles have shortened, as businesses have been reticent to invest heavily, in case of a further deterioration in the financial system, global economy or because of wayward political decisions. Therefore, whilst we can be relatively comfortable in our short term appraisal of the economic outlook, our crystal ball gets cloudier the further forward we look. We are certainly not blasé about the potential for further flare ups across the channel but we believe that after all the efforts of politicians and the European Central Bank, the immediate outlook is less concerning than the last couple of years.