Recession signals – Taking a more defensive position could be wise, Bill Jamieson

,

Here’s a headline few thought they would see this year: “Time to take profits after Brexit vote.”

But here we are, more than a month after voters opted for Leave in the European Union referendum and the FTSE 100 at 6,724.43 is sporting a 14 per cent or 824 point gain from its immediate “poll shock” low. It is now up 21 per cent from its 12-month low of 5,536. The FTSE 250 Index – more reflective of the fortunes of UK-focused medium-sized companies – is still 3 per cent below its 12-month high, but it has rallied 15 per cent from its initial Brexit vote low.

These are potent gains and ones which few predicted as markets struggled to come to terms with the verdict of voters. The gains are even more remarkable given the backdrop of a slowing economy and a raft of surveys showing a marked drop in business confidence.

But investors have taken heart from loud hints from Bank of England governor Mark Carney that interest rates would be cut in order to temper the hit to business investment. New Chancellor Philip Hammond has reaffirmed that the 2020 budget deficit reduction targets will be scrapped and has hinted at a “reset” of economic policy in the Autumn Statement – widely interpreted as meaning fiscal loosening.

Cheaper money and more government spending: the two stand-by policy responses to fears of an oncoming recession – we will have to await confirmation of these and wait even longer to see if they have really staved off the recession threat. But for now investors have enjoyed the fresh uplift to equity prices.

And that uplift now looks to have discounted all the good news and turned a blind eye to continuing signs of a global slowdown. Indeed, markets could now be set for a combination of profit-taking and a reappraisal of an altogether sanguine outlook. Without further “good news” to sustain this level of equity prices, the rally of the past five weeks could now have run its course.

The financial news website Citywire carried a warning last week from Adrian Lowcock, head of investing at AXA Wealth, that investors should pay attention to the VIX, a measure of volatility known as the “fear index”. After spiking following the shock result of the EU referendum, it has now fallen to a 12-month low.

Lowcock believes that this could be a sign that stock markets are heading for another shock. “When it’s low,” he said, “people are confident and not fearful. And when it ramps up people are running for the hills. But it’s a counterintuitive index – it was this low just before the China Black Monday [sell-off in 2015].”

SOURCE: Scotsman – Bill Jamieson

GOT ENOUGH? How much cash should your portfolio hold?

,

Understanding the multiple roles cash has to play in investment portfolios can help investors overcome the often-criticised downside of holding cash. For example, money currently earns very little yield and it remains subject to inflation risk.

For the purpose of this article, I am only referring to cash held within portfolios, and not to other and separate reserves that investors must retain to meet unexpected expenditure.

I’ll start by tackling the shortcomings of holding cash. Of course, in this financially repressive period of low interest rates and mildly positive inflation, cash is indeed costly. Still, we believe that asset allocation decisions should be made through a valuation-driven framework.

Cash provides stability

If valuations of risk assets appear extremely rich, we argue it is better to hold some cash and potentially accept temporary purchasing power erosion from inflation than to hold overvalued assets and risk substantial losses in an attempt to earn a higher portfolio yield.

Cash performs three main roles in portfolio construction. First, and most obvious, is that it provides stability and readily available funds to meet known liabilities, such as regular fixed drawdowns. It therefore avoids the need to sell investments at inopportune times.

Second, holding cash provides defensive diversification benefits. The principle of diversification remains a key building block of effective asset allocation.

graph 1

The idea that introducing imperfectly correlated assets to a portfolio can both decrease risk and enhance opportunities for return is well established in academic literature and among investment managers.

Serious warnings

Correlations between asset classes, however, change over time. A closer look at historical correlations shows an important trend has emerged and even strengthened: correlations of most risk assets to global equities have increased remarkably over time, as shown by the chart above.

From a portfolio perspective, we think some serious warnings are in order. The fact that these risky asset classes tend to move in tandem with each other, rather than being a counterweight, indicates that the potential for diversification is low.

Central banks can affect sentiment, risk-taking and flow of capital into (and out of) risk assetsDuring the 2008-2009 financial crisis, most asset classes moved in one direction (down) and most short-term correlations strengthened. Spikes in cross-correlations have certainly become more pronounced, exacerbated by risk-on, risk-off trading and high capital mobility.

It is also apparent that central banks have the ability to influence stocks in the short run, alter historical asset class correlations and fuel contagion within them.

By controlling liquidity injections and influencing the rate of return on “safe” government bonds, these monetary institutions can affect sentiment, risk-taking and the flow of capital in (and out) of risk assets.

As a result, asset class diversification, which aims to help mitigate portfolio losses, has tended to fail exactly when it’s needed the most.

‘Dry powder’

Amid this secular rise in correlations, cash and short-term bonds are the only asset classes that have reliably delivered low to negative correlations with risk assets, especially during times of market stress.

There are other defensive assets that can provide low correlation relative to stocks, such as gold. But while gold provides a similar level of diversification as cash, it comes with significantly higher volatility.

A third function for cash is to serve as “dry powder” for opportunistic investment. In order to be successful, we need to be prepared to navigate some pretty choppy waters without losing sight of our long-term objective, which is to protect and grow our clients’ capital.

During periods of market overvaluation, cash allows us to both avoid the negative impact of downturns and take advantage of future opportunities that offer better risk-adjusted returns.

What’s interesting about the three main roles cash has to play in portfolios is how closely they are interlinked. The need for liquidity is often highest when correlations among assets are spiking, diversification is failing and forced deleveraging is occurring.

In these situations, valuations become distorted due to forced selling and investor panic, which can be just the right time to put dry powder to work and acquire assets at discounted valuations.

So, how much cash should a portfolio hold? The answer will vary depending on the objective and risk profile of the portfolio, but consideration for absolute and relative value, expected returns on competing assets (bonds and equities) and market conditions will contribute to the decision-making process.

In the current climate we feel it’s prudent to hold sufficient cash to be able to commit to special situations which are deemed to have exceptional risk versus return profiles should they present themselves.

Ryan Paterson is research analyst at Thesis Asset Management.

 

SOURCE: Interactive Investor – iii.co.uk

Gallery post

Pellentesque iaculis dictum nisl at lacinia. Sed et lacinia justo, eget consequat dolor. Phasellus a pretium dolor, nec bibendum nunc. Mauris posuere purus mattis, sollicitudin diam a, fermentum nisl. Pellentesque dignissim velit et erat aliquam condimentum. Donec ac fringilla urna. Morbi rhoncus massa a magna dictum varius. Quisque mauris lectus, tincidunt sit amet purus sit amet, vehicula placerat ligula. Sed velit nibh, molestie dignissim purus sit amet, sagittis mollis eros. Vivamus vel mattis nibh, consequat lobortis leo. Donec eu tellus quis libero pulvinar commodo. Nulla et facilisis quam. Vivamus sed quam sit amet augue iaculis rutrum. Aenean aliquet est vitae lacus laoreet porttitor. Maecenas aliquet sem quis elit commodo, non facilisis magna bibendum. Nulla facilisi.

Phasellus egestas dictum pulvinar. Donec ac erat id quam condimentum accumsan a vel nulla. Vestibulum commodo commodo congue. In finibus nunc nec odio lobortis egestas. Mauris commodo ligula vitae dapibus tincidunt. Quisque mollis accumsan augue, vel luctus est interdum id. Integer sit amet nunc vulputate, viverra purus eu, bibendum lorem. Duis sagittis pretium tortor eu tempus. Proin egestas ut purus vel malesuada. Integer felis nisi, elementum sed scelerisque in, volutpat et lorem. Suspendisse potenti. Praesent eget sem a neque lobortis euismod ac id leo. Duis ultricies leo non orci congue mollis. Aliquam pellentesque augue nec neque finibus blandit.

Image post

apply-post

Aenean et iaculis lorem, ut aliquet elit. Phasellus elit lorem, vehicula ut quam fermentum, pellentesque ornare sem. Pellentesque et neque lorem. Fusce mattis augue sit amet nibh sagittis, at dictum erat maximus. Praesent congue, justo nec lacinia rutrum, nulla quam vulputate enim, vel lobortis elit quam quis ante.

Tutrum laoreet dui ut, vehicula mollis purus. Fusce fermentum maximus nibh at tempor. Pellentesque habitant morbi tristique senectus et netus et malesuada fames ac turpis egestas. In pretium tincidunt arcu, eget consectetur lacus malesuada id. Mauris ultricies nulla eu velit dictum interdum.

Small content heading

Perspiciatis unde omnis iste natus sit voluptatem accusantium doloremque laudantium, totam rem aperiam, eaque ipsa quae ab illo inventore veritatis et quasi architecto beatae vitae dicta sunt explicabo. Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, conse.

Tutrum laoreet dui ut, vehicula mollis purus. Fusce fermentum maximus nibh at tempor. Pellentesque habitant morbi tristique senectus et netus et malesuada fames ac turpis egestas. In pretium tincidunt arcu, eget consectetur lacus malesuada id. Mauris ultricies nulla eu velit dictum interdum.

[trx_quote cite=”#” title=”Robert Smith. Company Director” top=”small”]Convallis volutpated nec felis ut est gravida pellentesque vitae sed ante. Suspendisse tortor tortor, auctor eget tellus fermentum, volutpat maxi.[/trx_quote]

Tutrum laoreet dui ut, vehicula mollis purus. Fusce fermentum maximus nibh at tempor. Pellentesque habitant morbi tristique senectus et netus et malesuada fames ac turpis egestas. In pretium tincidunt arcu, eget consectetur lacus malesuada id. Mauris ultricies nulla eu velit dictum interdum.

[trx_list style=”iconed” icon_color=”#202122″][trx_list_item]Perspiciatis unde omnis iste natus sit voluptat[/trx_list_item][trx_list_item]Doloremque laudantium, totam rem aperiam[/trx_list_item][trx_list_item]psa quae ab illo inventore veritatis et quasi[/trx_list_item][trx_list_item]Architecto beatae vitae dicta sunt explicab[/trx_list_item][/trx_list]

Perspiciatis unde omnis iste natus sit voluptatem accusantium doloremque laudantium, totam rem aperiam, eaque ipsa quae ab illo inventore veritatis et quasi architecto beatae vitae dicta sunt explicabo. Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui.

[trx_image url=”http://enterpriseuk.co.uk/wp-content/uploads/2015/11/story-post.jpg” shape=”square” top=”inherit” bottom=”inherit” left=”inherit” right=”inherit” align=”left” width=”300″]

Perspiciatis unde omnis iste natus sit voluptatem accusantium doloremque laudantium, totam rem aperiam, eaque ipsa quae ab illo inventore veritatis et quasi architecto beatae vitae dicta sunt explicabo. Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia.

Consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, conse.

Small content heading

Fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, conse. Tutrum laoreet dui ut, vehicula mollis purus. Fusce fermentum maximus nibh at.

Consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, conse.

[trx_br clear=”both”]

Fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, conse. Tutrum laoreet dui ut, vehicula mollis purus. Fusce fermentum maximus nibh at tempor. Pellentesque habitant morbi tristique senectus et netus et malesuada fames ac turpis egestas. In pretium tincidunt arcu, eget consectetur lacus malesuada id.

Quote post

[trx_quote cite=”#” title=”David Anderson”]Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, consectetur, adipisci velit, sed quia non numquam eius modi tempora.[/trx_quote]

http://themeforest.net/user/axiomthemes

Status post

Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.

Chat example

[trx_chat title=”Douglas Adams” link=”#” photo=”http://enterpriseuk.co.uk/wp-content/uploads/2015/11/savings-post.jpg”]Cras cursus eros vel commodo tincidunt. Donec ac urna eget velit bibendum aliquam. Phasellus tempor urna erat, a fringilla elit vulputate.[/trx_chat]
[trx_chat title=”John Doe” link=”#” photo=”http://enterpriseuk.co.uk/wp-content/uploads/2015/11/brand-post.jpg”]Vivamus euismod mauris id sodales tincidunt. Aliquam est nibh, fringilla nec elit ut, molestie dictum tellus.[/trx_chat]
Read more

Aside post

Vivamus euismod mauris id sodales tincidunt. Aliquam est nibh, fringilla nec elit ut, molestie dictum tellus. Proin porta egestas nisi a bibendum. Maecenas dictum semper nulla sed bibendum.