It will be a challenging year for investors, with heightened market volatility, central bank action and falling commodity prices creating a very different environment to that of 2014, according to Australian Unity Investment joint venture asset managers.
However, these same issues will create good opportunities for those that are able to seize them, agree Australian equities manager Platypus Asset Management; international equities manager Wingate Asset Management; and fixed interest manager Altius Asset Management.
Bill Bovingdon, chief investment officer at Altius Asset Management, said that there is a “great disconnect” between bond markets and economic data.
“In general, the bond market is out of line with fundamentals. There are a number of reasons for this, including the effect of global central bank policies, fears of deflation, and oil price impact.
“The central bank quantitative easing (QE) programs, in particular, are having a significant liquidity impact, buying up more bonds than they are issuing and pushing yields down.
“Fears of deflation are also playing a major role. Generally speaking, as long as inflation expectations are ‘well-anchored’, large moves in commodity prices – such as oil – typically have a transitory effect on inflation.
“We believe market expectations are still well-anchored and it is the short term prospect of negative inflation combined with QE that is distorting measures of long term expectations. Bond markets typically trade at a two to four per cent premium above core inflation, which is not the case at the moment.
“A focus on absolute returns will be critical for investors, as a large exposure to long interest rate duration will see capital losses in investor portfolios,” Mr Bovingdon said.
Chad Padowitz, chief investment officer at international equities manager Wingate Asset Management, said that equity markets are also facing much tougher conditions and there will be no ‘easy rides’ for investors.
“The post-global financial crisis bull market has very little steam left. Both valuations and profit margins are at the upper end of their historical ranges, which does not bode well for future returns.
“However, there is almost no competition for investment – interest rates are going nowhere fast, and there are few incentives to either buy or sell.
“This creates a market that is very sensitive and susceptible to the news of the day, which means a more volatile year ahead for markets,” he said.
Donald Williams, chief investment officer at Australian equities manager, Platypus Asset Management, said that he believes it is going to be a particularly tricky year for investors.
“Our view is that divergent earnings expectations will suit bottom-up stock pickers, and there will be clear winners and clear losers.
“We are focussing on companies that have withstood the challenges of the recent economic environment better than most over the last few years, and which are likely to continue doing so.
“Interestingly, the sharemarket is up by three percent since the start of the calendar year which suggests many investors are expecting a positive reporting season, but I think that unfortunately, it’s going to be more bad news than good in February.”
Mr Williams added that the fall in commodity prices is already reflected in most share prices so this shouldn’t have a major impact over the short to medium term.
“Having said that, the mining sector is still very challenging, and investors should do their research thoroughly before taking on exposure to sectors such as iron ore.
“At Platypus, our view is that commodity prices will stabilise this year; the difficulty is in picking the market bottom,” Mr Williams said.
Mr Padowitz said that oil prices should recover without the need for any increased economic considerations.
“The current low prices are not sustainable – approximately eight percent of existing production needs to replaced each year, simply to stand still.
“Oil has very steep supply and demand curves and requires very large price movements to effect equilibrium.”
He added that the US looks to be the growth story for the next 12 months at least.
“Not that long ago, the US was the sick child of the global economy, but this is no longer the case.
“Testament to the fact that you can’t keep a good capitalist down, it has an accelerating economy that stands in stark contrast to most other developed and emerging economies. While the oil and gas sector will drag on capex growth and investment this year, low oil prices will play a big role in growth elsewhere,” Mr Padowitz said.
For further information please phone:
Mr Bill Bovingdon
Altius Asset Management
02 9112 4700
Mr Donald Williams
Platypus Asset Management
Phone 02 8270 8201
Mr Chad Padowitz
Wingate Asset Management
03 9913 0704