Between a rock and a hard place

I WAS not expecting us to make wholesale changes in the wake of this week’s sharp movements in markets and the deterioration in investor sentiment as this would have smacked of panic.

In the end our Asset Allocation Committee left our risk appetite unchanged, although that the decision was not taken lightly.

In terms of portfolio adjustments, we decided it was timely to take some profits on part of our long-held position in Japan and to switch those funds into the UK.

We also checked out of our emerging market government bonds and moved those funds into gilts as an insurance policy against deflation.

You might be forgiven for thinking that we should have done more in the light of all this volatility, but when markets move up and down in unison there is only a limited amount of relative value that appears between them.

So what changed so dramatically to cause the dramatic sell-off? The main cause was the policy change in China which led to a devaluation of the currency.

That heightened fears about the health of the Chinese economy, which then had a domino effect into other emerging markets and back to developed markets.

Investor sentiment switched from risk tolerant to risk averse as the sell-off fed on itself.

For us, the main consideration now is whether we ought to be as committed to equities as we are, and the accumulated evidence suggests we should.

Part of the reasoning is the lack of returns available elsewhere – cash continues to yield next to nothing; government bonds barely more and central bank policy continues to encourage investors to take some risk in order to accrue returns, be it capital or income.

Despite endless speculation as to the timing of the first US interest rate rise of the next cycle, monetary policy will remain incredibly loose by historical standards, and, if anything, could get looser still in Europe, Japan and China. The biggest risk is a global recession, but we don’t see one on the horizon.

John Wyn-Evans is head of investment strategy at Investec

Wealth & Investment

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